Central banks were designed to be powerful.

I mean, let’s just take all the drama that the US Federal Reserve (America’s central bank) has been causing as a starting point. Ever since the US Fed signalled its intent to battle the rise in inflation by raising interest rates, the global stock markets have been in disarray, followed by multiple predictions about a looming recession. To see the link with the stock markets, a key thing to remember is that traditional investors aren’t too hot on uncertainty. So, with the Russia-Ukraine crisis as context, in theory, rising US interest rates typically mean that these investors will seek safer havens (higher interest rates make government bonds more attractive) to store their wealth, at least until the dust settles.


Key takeaways:

  • Central banks are designed to be powerful. Two key features that allow them to be powerful is their independence and ability to act quickly. This puts them in a great position to respond in periods of crisis.

  • However, in some cases, the usual tools a central bank has at its disposal might not be enough to manage the economy. Nigeria, with its structural problems and asymmetric transmission mechanisms, is a case in point.

  • Overall, we need a broader approach to policymaking that does not rely too heavily on central banks alone.


In addition, when you go back to Econ 101, it’s easy to see why one of the central bank’s key tools—interest rates—can