Central Banks | CapitalNote

Why start with central banks?

Let’s start where I started, back in 2020, during one of the most significant financial events of my time: COVID. My goal back then was to be able to read and deeply understand the front page of the Financial Times. I still subscribe to the FT in print. There’s no greater joy than reading a physical newspaper, apart from the pain of throwing it into the recycling bin every weekend. The first thing I learned was about the role of central banks in economies and why they matter so much. We’ll start there.

Financial markets depend heavily on this institution called the central bank, and I’m sure your financial life is influenced by an interest rate that has some connection to its decisions. For consistency, we’ll mainly focus on the central bank of the United States: the Federal Reserve, or the Fed for short. Here’s a brief overview of some of its responsibilities, roles, and the actions it can take to address problems.

Making sure our banks don’t run out of cash

Banks accept deposits and give out loans. Customers can withdraw money quickly, while loans are repaid over many years. If too many customers withdraw at once (a bank run), the bank can struggle to pay them. This can lead to a catastrophic spiral of forced asset sales and fear among customers, and the problem can spread to other banks.

The Fed provides a backstop by letting eligible banks borrow against collateral through the “discount window.” It gives them money quickly to meet withdrawals and can prevent a temporary funding shortage from becoming a full-blown crisis. Ask ChatGPT more about historical bank runs, including the pressure on Silicon Valley Bank in March 2023 and First Republic, which ultimately closed in May 2023.

Spending can grow quickly or fall sharply

Economics 101 tells us that when demand exceeds supply, prices can rise. If price increases are broad and sustained, we call that inflation. Similarly, when spending collapses, businesses cut back on investment and jobs.

Either scenario can happen for many reasons and usually involves a chain of events. For example, consumers may have more cash because of lower interest rates or higher incomes, or they may feel more confident. They buy more homes, cars, and travel, while businesses struggle to keep up with orders and hiring. This can lead to shortages, which in turn can lead to higher prices. This is where the Fed can step in to raise rates to restrain borrowing and spending, bringing demand back into line with available supply.

Moving money between banks

Lastly, the Fed provides a reliable system for moving money between banks. It provides accounts and payments infrastructure for banks, monitors risks, and supervises parts of the banking system. Read about Fedwire for interbank transfers, FedACH for payments such as payroll, FedNow for instant payments, and FedCash for currency services.

Interest rates

We can’t have an introduction to interest rates without a chart of the Fed’s rate, 10-year Treasury yields, and 30-year mortgage rates. They’re closely related, but they don’t always move together.

Hover or tap for a reading. Use ← and → when the chart is focused. Click a series name to hide or show it.

Sources and methodology

Monthly observations, using the data snapshot retrieved on 18 October 2026. This chart is not a live feed. Historical data may be revised.

Fed funds is the effective traded overnight rate, not the midpoint of the Fed’s target range. Treasury yields are monthly business-day averages. Weekly mortgage observations are converted to simple calendar-month means and cut off at the latest complete month shared with Fed funds.

Sources: Federal Reserve / FRED: FEDFUNDS, Federal Reserve / FRED: GS10, and Freddie Mac / FRED: MORTGAGE30US.

Inflation

Hover or tap for a reading. Use ← and → when the chart is focused. Click a series name to hide or show it.

The dashed line marks the Fed’s longer-run 2% target for headline PCE inflation. CPI and core PCE are comparisons, not separate Fed targets.

Sources and methodology

Year-over-year percentage changes calculated from monthly price indices: (index ÷ index in the same month a year earlier − 1) × 100. These are 12-month changes, not annualized one-month readings. Missing observations remain missing, and the series may end in different months.

Embedded data snapshot retrieved on 18 October 2026, matching the original Monetary Atlas chart. This is not a live feed. Historical observations may be revised.

Sources: BEA / FRED: headline PCE, BEA / FRED: core PCE, and BLS / FRED: headline CPI.

Jargon

A quick reference to the terms used in this chapter.

Hawkish and dovish: These describe policymakers’ preferences. Hawkish implies that a policymaker leans towards containing inflation by raising rates, delaying rate cuts, or keeping policy restrictive for longer. The opposite is dovish, where the policymaker leans towards supporting employment and economic activity by cutting rates or pausing rate increases. Keep in mind that these terms are relative: if markets expect a 0.5-percentage-point increase but the Fed raises rates by 0.25 percentage points, that’s a dovish surprise, even though rates increased.
Tightening and easing: Related to the above, but used to describe changes in the Fed’s broader monetary policy. Restrictive and accommodative are related terms that describe the stance of policy.
Neutral rate and terminal rate: The neutral rate is the estimated interest rate that neither stimulates nor restrains the economy. The terminal rate is the expected peak rate in a hiking cycle, the point at which investors expect rate hikes to end.
Forward guidance: Signals about the likely future direction of policy.
Data-dependent: Decisions depend on incoming evidence about inflation, employment, and other economic metrics. Data can be “hot” or “cool,” depending on whether readings are stronger or weaker.
Pricing in: An expectation is already reflected in market prices: investors have positioned for it, so the event itself may offer little surprise.
Sticky inflation: Inflation that remains persistently elevated and is slow to decline.
Core PCE: A consumer price inflation measure that excludes food and energy, used to examine underlying inflation. PCE stands for personal consumption expenditures.
Soft landing and hard landing: A soft landing means inflation comes down without a recession or a large deterioration in employment. A hard landing involves a recession and substantial damage to employment.
QE, QT, and tapering: The Fed’s balance sheet is also a tool for monetary policy. Quantitative easing (QE) means large-scale securities purchases intended to ease financial conditions. Quantitative tightening (QT) reduces securities holdings, for example by allowing principal repayments to run off without fully reinvesting them. Finally, tapering asset purchases means buying less each month.