***BEFORE WE START***

Do you know how much money you need to retire? We can help you figure it out! Check out the link at the bottom for a free retirement calculator.

Now…onto the topic at hand.

Central banks

When you hear about “central banks,” it might sound like something only economists should worry about. But what if I told you the actions of central banks affect your savings, investments, and even how much you pay for your mortgage or credit card? Well, that’s what I’m telling you!

Central banks can have a real impact on your daily life. So, let’s break down what they do and why they matter to you.

What are central banks?

Central banks, like the Federal Reserve in the U.S. or the European Central Bank, are in charge of managing a country’s money. They don’t work like regular banks where you can deposit money or take out a loan. Instead, they have big-picture responsibilities, like keeping the economy stable and making sure prices don’t rise too fast (inflation). 

Remember when inflation was getting crazy after the pandemic? Central banks around the world each worked to lower inflation in their countries.

What does it mean to “print money”?

Sounds fun right? This whole money printer thing? Well…it is…much more boring than it sounds.

When people say a central bank "prints more money," it doesn’t mean they literally crank up the machines and start making a bunch of new bills (despite the above picture). It’s more about increasing the amount of money that’s available for people to use. Here's how it works:

Imagine the economy is like a big game where people trade money for things they need—like food, clothes, or video games. If there’s not enough money in the game, it becomes hard for people to buy stuff. So, the central bank has a way to "add" more money to the game without actually printing new bills.

They do this by:

1. Lowering interest rates: This makes borrowing money from banks cheaper, so more people and businesses take out loans and spend that money. It’s like adding more "money" to the game because people have more to spend.
   

2. Buying bonds: A bond is like an IOU from the government. When the central bank buys bonds, it gives money to the governments or companies selling the bonds, putting more money into the economy.

When a central bank prints money, its assets grow. Check out the U.S. Federal Reserve’s assets since 2002:

They spike most when the central bank needs to step in and help the economy: 2008 and 2020.

Who cares? They won’t lend me a money printer.

True, but central banks are important because they keep the economy balanced. Their main job is to fight inflation (rising prices) and avoid recessions (when the economy shrinks).

After the massive spike in inflation, which peaked in June 2022, the U.S. Federal Reserve increased its interest rate to the highest it’s been in 23 years!

By changing interest rates, they help control inflation and keep people employed. When the economy is too hot (too much spending), they raise rates to cool it down. When it’s too slow, they lower rates to encourage borrowing and spending.

Why should I care as an investor?

1. Interest rates affect you directly: Central banks’ decisions on interest rates impact how much you pay on loans, credit cards, and mortgages. When rates are low, borrowing is cheaper, which can help you buy a home or a car. When rates are high, it becomes more expensive.

   

2. Your investments react to central banks: If you invest in stocks or bonds, central bank decisions can make a big difference. When they raise rates, stock prices might fall because borrowing becomes more expensive for companies, which hurts their ability to grow. On the other hand, bonds may pay higher interest when rates go up, which can make them more attractive.
   

   

   
   

3. Inflation affects your savings: If inflation is too high, the money in your savings account loses value. Imagine you have $1,000 saved up, but prices are rising quickly. The value of that $1,000 doesn’t go as far. Central banks aim to keep inflation low so your savings can keep their value.

Why should I care right now?

Central banks are lowering rates around the world! Borrowing is becoming cheaper, so we should expect businesses to grow and the economy along with them. The European central bank has cut once and the Canadian one has cut three times already. Most importantly, the US Federal Reserve, America’s central bank, is set to start cutting interest rates this month. As the largest economy in the world, all eyes are on them with this pending decision. 

It’s a delicate balance. If central banks cut too quickly they might cause short term market panic, with investors thinking the economy is in such a bad state that a big cut is needed. Too big of a cut could also reignite inflation. If they cut too slowly or not at all, high interest rates will continue to choke the economy and markets will also panic. They need to do not too much, not too little, juuuuust right. Goldilocks setting.

The bottom line

Central banks play a critical role in shaping the economy, and their actions have a direct impact on your everyday life—whether you’re borrowing money, saving, or investing. By paying attention to what central banks are doing, you can better protect your money and even grow your wealth over time.

And, yes, unfortunately, the money printer is not available for personal use.