How central banksset interest rates.
Understanding how central banks set interest rates is the base of macro trading. They balance 2 things: keeping inflation near target and keeping the economy growing.
Every decision is a weighing of the data on both sides.
The mandate
Most central banks target inflation around 2%. Some, like the Fed, also aim for maximum employment. When inflation is too high, they raise rates. When growth is too weak, they cut.
Why the tone moves first
Central banks signal their next move through speeches and statements. The market prices those signals long before the decision, which is why the tone often moves a currency more than the decision.
Use it in real trading
The tool informs the decision, it never makes it. Here is how it plays out on real trading days.
Speakers hint at a hike for weeks. The currency rises before the meeting and barely moves on the day.
A bank that sounded worried about inflation starts talking about growth. That shift is the trade.
Mistakes to avoid
- Waiting for the decision to form a view.
- Ignoring speeches between meetings.
- Forgetting the inflation target.
What makes it different
Central bank tools, rate probabilities and the calendar of speakers sit in 1 workspace.
Questions
How often do central banks meet?
Usually 8 times a year for the big ones.
What is the inflation target?
Around 2% for most major central banks.
Why do they talk so much?
To guide expectations, so decisions do not shock the market.