Describe how the US financial markets impact the economy, businesses, and individuals.
In the United States, the financial markets play a significant role in promoting economic development. For example, the financial market has a significant impact on pension funds. Large percentages of pension funds are invested in stock market. In the event whereby the share prices record a drastic fall, the effect is reduction in pension payouts in the future.
Another effect of share price is investor confidence. The share price is an indicator of a company’s performance. A reduction in share price reduces the investor confidence. This was the case in Lehman Brothers. When the share prices began reducing, the demand reduced significantly. In 2007, the shares price and demand in major US companies reduced significantly because of fear of looming recession. During such instances, investors prefer to bank their money rather than investing in shares. In America, stock market trend is used to forecast recession.
At the business level, the share prices affect the company’s ability of raising funds by selling shares. This trend affects large organizations that wish to expand further by releasing more shares to the stock market. As long as an organizations is recording a high performance, shares presents an easy way of raising more capital. However, this becomes difficult when shares records trend of reducing price (Poon, 2012).
A reduction in prices of shares in stock market makes alternative investments more appealing. In several cases when the bond market records a downward trend, investors sell shares and invest in gold or government bonds. These alternative investment approaches guarantees investors of favorable returns when other investment alternatives are unpredictable.
Explain the role of the U.S. Federal Reserve, the Federal Reserve Chairman, and Board, indicating its effectiveness in today's economic environment. Provide support for rationale.
The Federal Reserve is used in the United States as a central banking system. Establishment of the Federal Reserve followed the approval of Federal Reserve Act. This Act was approved after a series of financial panics. The main roles of US Federal Reserve include regulation of interest rates, stabilization of market prices, and creation of employment opportunities. The Federal Reserve is charged with the role of spearheading national monitory policy, control of bank interest rates and lending, and financing reservoir institutions. The Federal Reserve also embarks on research with an aim or understanding the country’s economic position, and making publications of financial magazines. In 2006, Ben Bernanke was elected as the new chairperson to replace Alan Greenspan who had served in that capacity since 1987 (Gaffeo & Tamborini, 2011).
Federal Bank Chairman plays the roles of a spokesperson and representative in the Board. He also tables board meetings as the head. The Chairperson is also head in Federal Open Market Committee.
The main role of the Board is to make major decisions for Federal Open Market Committee (FOMC). The Board members hold significant votes that determine the country’s monetary policy. Moreover, the Board has the mandate of setting reserve requirements. Other responsibilities include approval of discount rates, supervision of Reserve Bank activities, appointment of directors in the Reserve Bank, and approving annual budgets of reserve bank (Gaffeo & Tamborini, 2011).
Explain how interest rates influence the U.S. and global financial environment. Provide support for explanation.
The impacts of the interest rates can be either positive or negative to the global financial environment. When the Federal Reserve board adjusts the borrowing rate, several effects are experienced in the economy. This adjustment can take place on daily, weekly or monthly basis. In order to ensure that inflation remains at a manageable level, the Federal Reserve board monitors indicators such as produces price index and consumer price index. As these indicators increase by more than 3 percent per annum, the Federal Reserve board increases funding rate in order to ensure that prices remains at manageable level. High interests rates results in higher borrowing costs. As a result, spending among individuals reduces. This trend leads to reduced consumption of goods and services, resulting in fall of inflation. A good case study of inflation was witnessed in 1982. Consequently, the Federal Reserve board increased interest rates to 21 percent. The outcome was widespread trend of recession. On the other hand, reducing interests rates can end recession. After reducing federal funding rates, demand for borrowing increases because it becomes cheaper to finance a loan. This trend encourages people to begin increasing expenditure again. In 2002, the Federal Reserve board reduced interest rates to 1.25 percent. The outcome was a significant recovery of the economy.
Describe how exchange rates may impact a business's decision to operate in foreign markets.
Exchange rates have an impact on investments funds or capital that moves into an economy. Countries with highly weakening currency have a low likelihood of attracting foreign investments. In such cases, foreign investors liquidate their bonds, stocks, and real estate in fear that these investments may lose value in comparison to investments in other foreign countries with strong currencies. International savers targets nations with fixed exchange rates. Their investment confidence in foreign countries increases after being guaranteed of improvement in foreign currencies.
References
Gaffeo, E. & Tamborini, R. (2011). Comment on: Federal Reserve Policy, Interest Rate Volatility, and the U.S. Capital Raising Mechanism/The Effects of Alternative Monetary Control Procedures on Exchange Rates and Output. If the Financial System Is Complex, How Can We Regulate It? International Journal of Political Economy 40 (2): 79-97.
Poon, W. (2012). Incorporating IFRS into the U.S. Financial Reporting System. Journal of Business & Economics Research 10 (5): 303-311.
