Cadence Research · Reviewed 2026-07-30
What is a central-bank reaction function?
A central bank's reaction function is a practical description of how it tends to respond when inflation, employment, growth, or financial conditions change. It is not a fixed formula that automatically produces a rate decision. Instead, it is a way to understand which evidence policymakers emphasize and how strongly they appear to react to it.
Why it matters
The same inflation number can prompt different responses depending on wage growth, demand, expected inflation, and the central bank's starting point. A reaction function organizes those trade-offs.
How it appears in official communication
Officials often explain what would make them more confident that inflation is returning to target, or what developments would change their assessment. Those conditional statements reveal the inputs they are watching.
A common misunderstanding
A reaction function is not a forecast or a promise. It can change as the economy, the policy framework, and the people making decisions change.
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Related guides
Primary sources
- Monetary Policy: What are its goals? (Federal Reserve)
- Monetary policy (European Central Bank)
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