Financial System Financial Markets Are the Places

Financial System

financial markets are the places where capital exchanges hands. Those with capital to invest are able to invest in businesses that are seeking capital. The same occurs with financial institutions as intermediaries. The result is that the economy benefits significantly from this arrangement. People with good ideas are able to raise capital in order to bring those ideas to market. For businesses, the U.S. financial markets are a source of investment capital that helps them to grow. With a wealth of financial options at their disposal, businesses are able to thrive. U.S. financial markets also benefit individuals. As consumers, they benefit from having the choice that results from a strong business community. As investors, the U.S. financial markets give them places to earn a return.

The U.S. Federal Reserve plays the role of the central bank of the country, the regulator of the financial system and seeks to manage economic outcomes like GDP, inflation and employment. The Federal Reserve Board implements monetary policy, and the Chairman is the head of the Board. The board sets the discount rate, which is the basis for interest rates. It also conducts open market transactions and sets reserve requirements, which affect the supply of money in the economy. Through these means, the Fed seeks to stabilize the economy and create the conditions for stable growth (Federal Reserve.gov, 2013). The Chairman runs the Board, and is therefore the one who spearheads the decisions about monetary policy.

The effectiveness of the Fed in today's economy is subject to debate. Normally, the Fed has a strong impact, but that is because the fluctuations in the economy are not significant. Today, the Fed is trying any number of tactics to stimulate the economy, but has not been particularly successful. Keeping interest rates low for years usually results in an overheated economy and inflation but neither is happening right now. This does not mean that the rules have changed, just that Fed policy is not enough to be effective given the depth of the recession that we have been in.

3 Interest rates are a key component of recent Fed policy. In general, low rates constitute expansionary monetary policy while high rates constitute contractionary policy (Moffatt, 2013). Low interest rates lower the cost of money. With cheaper money, businesses and consumers are able to purchase more. In particular, businesses are more likely to invest because more projects become profitable when the cost of money is low. The result is that the U.S. economy should expand. In addition, the global financial environment should be positive with low interest rates in the U.S., because cheap dollars benefit business everywhere. There is also the issue of interest rates in other countries. The difference in the interest rates between two countries is normally reflected in the movement of the exchange rate between them.