Financial System US Financial Markets

Financial System

US financial markets need to be strong for the benefit of the different stakeholders, which include the market participants, consumers and businesses alike. For example, consumers benefit from having a place for deposits of their savings, or a place to get a mortgage. Banks serve as the financial intermediaries that allow for these things to happen. For businesses, it is similar. Businesses will store capital in the bank, but they also want to borrow from the bank, which allows them to expand by building new facilities. The economy overall benefits from the financial system. It is clear that when the system is in trouble, the economy also finds itself in trouble, because banks cannot lend and that constricts the flow of capital into the economy. A good strong financial system means better capital flow and therefore better economic outcomes.

The U.S. Federal Reserve is a system of banks that serves the purpose of being the central bank for the United States. The Board of Governors is the national component of the system, with the other component being the twelve regional Reserve Banks (Fed, 2013). There are seven governors on the Board, and they are appointed by the President and confirmed by the Senate (Ibid). The Board is the entity that guides monetary policy action in the United States. It does this by analyzing the national financial conditions. The Fed also governs the banking system, with supervisory control over the financial services industry (Ibid). The Chairman is the senior-ranking official on the Board.

The current economic environment is one of economic slowdown. The Federal Reserve has actually been quite aggressive with its monetary policy, but still faces issues where the GDP is not growing fast, inflation is very low and unemployment is still too high. Expansionary monetary policy, with low interest rates and the Fed putting money into the economy with open market transactions, is supposed to spur growth (Moffatt, 2013). This would appear to indicate that monetary policy has been insufficient to spur economic recovery. This is not for lack of monetary policy it does not appear, but maybe that monetary policy alone is not enough.

Interest rates are very low in the U.S. right now, and this should mean economic expansion. The U.S. is the largest single national economy is the world, so how the U.S. performs in terms of its economics is an important thing for the world. Growth in the U.S., spurred by low interest rates, should mean growth elsewhere as well, since the U.S. can buy more products from those countries and sell more products to them, too. If the economy begins to grow too quickly, the Fed will have to lower interest rates in order to slow down the pace of growth.