The Federal Reserve's role in the U.S. financial system

USA Financial System

financial system is one of the most complex systems in the world. There are several environmental factors which have an impact on the U.S. financial system such as the economy and federal regulation. The paper will look at the impact of financial market on the economy, businesses and individuals. It will also explain the role of Federal Reserve clearly indicating its effectiveness in today's economic environment. It will further look at the influence of interest rates on the U.S. And global financial environment. Finally, it will look at the impact of exchange rates on a business decision to operate in foreign markets.

U.S financial market

financial market comprises of financial transactions of any type that help in growth of businesses, and through which investors can make money. The financial markets affect the economy through stock and investing in stock. When the stocks of corporations are sold to investors, the companies will raise a lot of money, and it is the investors profits when a company increases its earning that keep the U.S. economy growing. Mutual funds enable the buying of a lot of stock at once hence creating a reduction in the volatility of the stock market resulting to a calming effect to the U.S. economy. The financial market affects businesses in that businesses can sell out their stock leading to an increase in investment in the business. This increase in investment means that the businesses will realize more profits. Individuals who have invested in shares will benefit if the company which they own shares is doing well. On the other hand they will be at a loss if the company is performing badly and might end up selling their shares. If share prices are falling, businesses will lack the ability to raise finances in the stock market (Amadeo, 2010).

Impact of interest rates on the U.S. And the global financial environment

A change in interest rates impacts the U.S. And Global financial environment in both positive and negative ways. Interest rates affect spending in that if the interest rates are low many people are willing to borrow money for purchases. With low interest rates there is creation of a ripple effect of an increased spending in both the U.S. And Global financial environments. Conversely high interest rates mean that consumers have no access to disposable income and they cut on their spending. The tight lending standards make people borrow less and spend less. Businesses will also reduce employees and hold off any purchases of equipment.

Interest rates also impact the stock and bond markets in the U.S. And global financial environment. An increase or decrease in interest rates has an impact on business and consumer psychology. Rising interest rates lead to businesses and consumers cutting back on their spending .This leads to a fall in earnings and consequently a drop in stock prices. On the other hand a fall in interest rates leads to increased spending and thus stock prices rise. Interest rates also affect the dollar value vs. other countries in the global market environment if interest rates are high in the U.S. compared to other countries investors from all over the world will want to invest in the U.S. so as to earn the high returns. Therefore, the increase in the demand for the dollar pushes its value up.

Exchange rates impact on decisions of businesses operation in foreign markets

Exchange rates are a form of global decentralization for the trading of international currencies. The foreign exchange rates are important as they assist international trade as well as investments in foreign markets as they enable currency conversions to be done easily. The exchange rates have an impact on the businesses decision of whether or not the business operates in foreign markets. If the exchange rates for the currency in a particular country are high then a business might not consider operating in the country. This is because the business will have to spend a lot in exchange for the currency .there is also a risk that is associated with foreign exchange. This is a financial risk posed when business are exposed to a change in interest rates which it did not anticipate. Therefore, most businesses do not expand their operation in foreign markets as they shield themselves from this exchange rate risk.

Reference

Amadeo, K. (2010).An introduction to the financial markets. Retrieved May 5, 2013 from http://useconomy.about.com/od/themarkets/a/capital_markets.htm