Make us your home page
Instagram

Q&A: Central banks pull the strings

What is a central bank?

Think of it as the big boss bank. In simple terms, in most countries a central bank is a government agency that helps to regulate economic activity. It might set interest rates, make emergency loans and set rules for other banks.

In the United States, the Federal Reserve System is independent. It's a public-private hybrid created in 1913. It gets its authority from Congress, but funds itself with investments. The idea is to keep politics out of monetary policy by protecting it from congressional budgets. But it's still subject to oversight by Congress.

Lately it has been invoking Depression-era powers — plus some new ones granted by Congress in the bailout package — to shore up a shaky financial system. That includes buying up banks' toxic investments, loaning out hundreds of billions of dollars and now directly purchasing some companies' short-term debt.

Meanwhile, central banks around the world have also had to dump billions of dollars into financial institutions to keep them afloat and have tried to coordinate to inspire confidence. Australia's central bank lowered interest rates by the largest amount since 1992 in a surprise move Tuesday, and that reignited hopes that others, including the Fed and European Central Bank, might follow suit.

Will our central bank cut interest rates?

If the Fed does lower its key rate from 2 percent it would mark an about-face. The Fed in June had halted aggressive rate-cutting to revive the economy out of fear those low rates would aggravate inflation.

Since then, financial and economic conditions have deteriorated, while record-high energy prices have calmed, giving the Fed more leeway to again cut rates.

Federal Reserve Chairman Ben Bernanke warned Tuesday that the financial crisis has not only darkened the country's current economic performance but also could prolong the pain. The Fed chief's more gloomy assessment appeared to open the door wider to an interest rate cut on or before Oct. 28-29, the central bank's next meeting.

What is commercial paper, and why is the Fed going to buy some?

Large corporations with good credit ratings don't need banks to borrow money. They just ask investors to loan it to them, offering written promises to pay the money back. They often borrow for short periods, from overnight to three months. It's a common way for large companies to maintain their cash flow to pay workers and buy supplies. Money market funds are typically the largest holders of commercial paper.

But lately, investors don't trust they'll get their money back — they're sticking it in safe government debt instead. So the market for commercial paper has dried up. That's why the Federal Reserve announced a plan Tuesday to buy companies' short-term debt. The Fed said it hoped that would jolt the commercial paper market back to life.

Becky Bowers can be reached at bbowers@sptimes.com or (727) 667-0509. Information from the Associated Press, Federal Reserve and World Book Encyclopedia was used in this report.

Q&A: Central banks pull the strings 10/07/08 [Last modified: Wednesday, October 8, 2008 2:38pm]
Photo reprints | Article reprints

© 2017 Tampa Bay Times

    

Join the discussion: Click to view comments, add yours

Loading...
  1. Tampa is 15th-most popular city to move to with U-Haul

    Markets

    TAMPA —Tampa is undoubtedly a destination point, at least according to U-Haul.

    Tampa is the No. 15 destination for people moving with U-Haul trucks. | Times file photo
  2. Florida's economy growing faster than other big states and far better than U.S. overall

    Business

    When it comes to economic growth, Florida's running alongside the leading states and well ahead of the United States as a whole.

  3. Westshore Marina District project takes shape with another acquisition

    Real Estate

    TAMPA — One of Tampa Bay's prime waterfront areas took another major step toward redevelopment Friday as WCI Communities bought 2.35 acres in Westshore Marina District.

    WCI Communities, Lennar's high-end subsidiary,has paid $2.5 million for 2.35 acres in the Westshore Marina District for 35 townhomes. WCI is under contract  to buy an additional 9.5 acres.
[BTI Partners]
  4. Posh Guy Harvey RV park to open in Tampa Bay with $250,000 cottages

    Business

    HOLIDAY — Love those Guy Harvey T-shirts with the soaring marlins? In the not too distant future, you might be able to kick back in your own Guy Harvey cottage in the first-ever Guy Harvey RV park.

    Renderings of the clubhouse and an RV cottage site of the planned Guy Harvey Outpost Club & Resort Tarpon Springs.
[Guy Harvey Outpost Collection]
  5. Port Tampa Bay secures $9 million grant to deepen Big Bend Channel

    Business

    Port Tampa Bay has secured a $9 million grant from the U.S. Army Corps of Engineers for the widening and deepening of the Big Bend Channel in southern Hillsborough County.