Financial markets are generally the financial transactions that help investors and businesses thrive financially. Changes in interest rates could have positive or negative impacts on markets in the U.S. Financial markets therefore play a major role in regards to accumulation of the production of goods and services and capital as well. With the help of well developed financial markets and institutions, the economy is able to scrutinize economic growth and financial structures which efficiently and openly direct investment and savings in the economy.
Economically, the stock market impacts differently on people who have shares with a possibility of them losing their wealth. As a result of the loss, these people may develop the urge of spending more money and in the long run they could end up spending all their money and investments. On investments, firm's capacity to raise stock market finances could be hampered with as a result of a fall in shares (Mankiw, 2011, p. 111). A drop in the stock market would consequently boost other investments making them more attractive. These kinds of investments are moreover beneficial since they could offer better returns in unpredicted times such as those of uncertainty.
The Federal Reserve is a crucial position that focuses wholly on economics in the United States. The Federal Reserve board has a role to play in economics. Headed by the Federal Reserve chairman, the Federal Reserve Board carries out monetary policy of the entire Federal Reserve System. Firstly, it supervises, determines interest rates and regulates US banks. Additionally it controls the amount of destroyed and created currency on a daily basis. It also plays the role of determining interest rates that followed and watched by many entrepreneurs, average Americans and investors in America. Following the happenings of the recession that occurred after the dot.com bubble burst, the Federal Reserve embarked on raising all the prime interest rates. Soon after the recession, the board chairman took a stand on the matter and announced the end to hiking of these rates which had caused close to 200 point jump in the dominant Dow-Jones Index. These incidences demonstrate the extent to which actions of the Federal Reserve can significantly affect the economic market alongside the distribution of currency.
The Federal Reserve chairman is an important member in the firm with exceptional responsibilities in the world of economics in the United States of America. In his docket, he carries out various tasks of management in the organization. Ben S. Berbanke is the chairman of the Board of Governors of the Federal Reserve System and also the Chairman of the Federal Open Market Committee. As the chairman a lot of responsibilities as assign to him. He guides the monetary policy which is the among the top figures world economics and in the US. As a second term Chairman of Federal Reserve System Dr. Bernanke plays an important role in managing the organization. In his position, he determines interest rates, regulates United States banks and controls the amount of legal tender created and destroyed on a daily basis While in his first months in office as the chairman, Dr. Bernanke stopped the infamous recession that followed after the burst of the dot.com bubble after announcing an end to the rate hikes that had caused close to 200 point jump in the predominant Dow-Jones Index. (Thomchick, 2000, p. 94). These happenings demonstrated the extent to which the Federal Reserve can cause to the economic market. However, the chairman’s role in management is evidently seen.
Monetary supply contraction can be attained indirectly through an increase in the nominal interest rates. There are monetary authorities within different nations with different control levels of economy-wide interest rates. In the United States for instance, the Federal Reserve may set discount rate alongside achieving the intended Federal funds rate provided by the open market operations. There is a significant effect accrued at the rate on various market interest rates though there isn’t a perfect relationship. In America for instance, operations in the open market have a small margin in regards to the whole volume within the bond market. Therefore independent targets for both the interest rate and the monetary base cannot be set since both of them are actually modified using a single tool, open market operations therefore should choose uniformly the one to use. In other nations, however, monetary authorities could defectively monitor saving accounts, loans or various financial assets. The monetary authority under its control could then contract the monetary supply through raising interest rates, since higher interest rates discourage borrowing and encourage savings (Shenkar, 2008, p. 104). These two scenarios in the long run see a decrease in the volume of the money distribution.
Portions of liabilities and assets that are denominated in various currencies are exposed to many risks related to exchange rates of foreign countries. A rise and fall of currency exchange rates result in higher costs or lower revenues in currency, this event could affect financial results. Such events create doubts in the minds of investors and business people and would hinder decisions of
References
Mankiw, N. G. (2011). Principles of economics. Mason, Ohio: Thomson South-Western.
Thomchick, J. A. (2000). The amazing common sense guide for your investment success: The whole investor approach for the new mellennium. San Jose: Writer's Showcase presented by Writers Digest.
Shenkar, O., & Luo, Y. (2008). International business. Thousand Oaks, Calif: Sage Publications.
