A:

Volatility is defined and measured in several different ways, making it somewhat difficult to generalize the impact of central bank decisions. In its most broad interpretation, market volatility refers to the size of the range of market swings in major exchanges or indexes. Most investors and analysts consider volatility a corollary to risk, thereby relegating the meaning of volatility as shorthand for "likelihood of suffering financial loss."

Most countries around the world rely on central banks to enact monetary policy and regulate private savings and loan institutions. Major central banks such as the Federal Reserve in the United States or the Bank of England are charged with the role of minimizing economic volatility, injecting liquidity into the financial system, promoting full-employment and reducing fears of inflation or deflation.

In this sense, there are some competing views on the actions of central banks. Many believe that by curtailing negative macroeconomic phenomena, central banks limit market volatility and provide reassurance to investors. There are some notable critics of central bank policy tools as well. It is possible for interest rate manipulation and money stock creation to distort financial markets and encourage misallocation of capital, creating asset bubbles that lead to increased volatility down the road.

It is difficult to estimate just how much central bank policy decisions should impact an investment strategy. Banks' actions do not directly target stock prices, and they can be difficult to capture inside technical indicators. There are some metrics used by market participants to gauge current and past volatility, such as the S&P Volatility Index, the FTSE 100 on the London Stock Exchange. However, these rely heavily on variables, such as standard deviations in large cap stock prices, that are not controlled by central banks.

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