Financial markets refer to a combination of markets where diverse products are traded. The products that are traded include derivatives, foreign exchange, equities, bonds, stocks and fixed income securities. Financial markets provide a platform for businesses and companies to be able to reduce risks, raise money to grow and where investors go to make money. Some of the characteristics of a financial market include forces of demand and supply determining the price of products, transparent pricing system, regulations and rules of trading, etc.
When financial markets of any nation function smoothly, there is a direct impact on the economic growth in that nation. The financial market in the United States is considered to be the most developed in the entire world. The number of transactions, both money and capital, which are traded in a day is humongous. The United States financial markets in have an effect on the investment levels in the country, the bond market, the wealth of the country, the confidence of the people, pensions, etc. For example, if the stock market performs poorly, it will lead to traders will assume a decrease in their wealth which will lead them to affect their outlook on investment if the decline is deemed significant. Consequently, there will be a decline in spending as a precautionary measure. The opposite is also true in the case of a notably good performance in the stock markets. This effect on wealth is however more prominent in the housing market. This is because the people who trade in shares are risk takers and are prepared to incur losses (Konoe, 2014).
Financial markets performance affects individuals in many ways. One of those ways is the impact it has on individuals’ confidence. When there are negative reports concerning financial markets, peoples’ confidence is affected negatively.
Individuals who have private pension schemes are also affected. This is because all pension funds invest huge parts of the funds they receive in the stock market. Any fall in the share prices, therefore, has the effect of reducing the pension funds’ value. The effect of this is lower payouts in the future. In the event that the decline in share prices is too much, then pension funds may have difficulty meeting their promise to pay (Konoe, 2014).
Financial markets also affect businesses. When the stock market performs poorly leading to reduction in share prices, the ability of businesses to raise money through the stock market is hampered. This means that businesses will have insufficient funds to cater for growth (Grey, 2005).
The financial market is monitored by the United States Federal Reserve. The Federal Reserve is concerned with promoting growth in the United States and sustains it, monitor interest rates, promote high employment rates and ensure that prices are stable in the economy. The Federal Reserve does this by controlling the monetary policy, regulating and supervising financial institutions like the banks as well as offering some financial services to the governments, financial institutions and foreign official financial institutions. The Federal Reserve also plays an important role in ensuring that the payment system is effective.
The Federal Reserve chairman is the face of the Federal Reserve. He/she is responsible for overseeing the activities of the Federal Reserve. He reports to the congress on the same and maintains close contact with key officials and stakeholders in the economy. The chairman is also a member of international financial institutions as a representative of the United States (Grey, 2005).
Effect of Interest Rates on the Economy
Interest rates have a direct impact on the economy of the United States. It affects spending, inflation, recession, bond and stock markets. High-interest rate makes investment very expensive and hence discourages the same leading to a decline in economic growth. Anytime injections are reduced in an economy the economic growth declines. On the global front, when a superpower like the United States experiences inflation due to excessive supply of money as a result of reduced rates of interests, there is bound to be a spillover effect which could lead to a global financial crisis.
- Grey, G. B. (2005). Federal Reserve System: Background, analyses and bibliography. Huntington, N.Y: Nova Science Publishers.
- Konoe, S. (2014). The politics of financial markets and regulation: The United States, Japan and Germany.