The link between central bank assets and interest rates
The central bank's balance sheet and interest rates are two sides of the same coin. To translate monetary policy, you must understand how the modern banking system works.
When you send money to a friend, your bank sends it from your account to hers. The numbers in your account go down by the same amount hers goes up.
If you and your friend use the same bank, the transfer is simple: one account to the other. But if you use different banks, your bank will send the money to your mate's bank, which will then pop this money into her account.
But your banker didn't pack up the cash and post it to your friend—they did a digital transfer. Your bank transfers money from their account at the central bank to the other's central bank account. This is called an interbank transaction.
Thousands of these interbank transfers happen every hour. To simplify the process, they do one big transaction at the end of the day instead of as they happen. If two banks owe money to each other, they only transfer the difference between what is owed at the end of the day.
The money in banks' accounts at the central bank is called reserves. Lawmakers …