What Is a Central Bank?

By Kristi Waterworth – Updated Feb 26, 2025 at 1:32 PM EST

Key Points

Central banks control money supply and set interest rates, impacting inflation and spending.
They regulate banks, ensuring stability through capital and reserve requirements.
The Fed, as the U.S. central bank, influences both local and global financial markets.

There are many kinds of banks in the financial system, from retail banks to central banks. If you're an investor, it's important to understand the importance of central banks.

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The facade of a building that says Federal Reserve on it. — Image source: Getty Images.

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It's also believed that the federal funds rate -- the interest rate set by the Fed -- influences bond yields. Although there is no direct correlation and certainly not a direct cause-and-effect relationship, a change in the federal funds rate can cause other interest rates to fluctuate, including the yield from newly issued bonds.

Such shifts can affect the prices of existing bonds on the secondary bond market, causing them to move in the inverse direction of the federal funds rate. The bonds can become more valuable if the federal funds rate drops, as the existing bond will have a higher yield than newly issued bonds, or vice versa. Monetary policy is a delicate financial dance, which is why it's left to a central bank.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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