Complexities of the U.S. Financial System
Professor Umair Warsi
May 4, 2013
The financial markets help to efficiently direct the flow of savings and investment in the economy in ways that facilitate the accumulation of capital and the production of goods and services. The combination of well developed financial markets and institutions, as well as a diverse array of financial products and instruments, suits the needs of borrowers and lenders and therefore the overall economy (Econ, 2005).
The stock market is an economic indicator of how well the U.S. economy is doing. If investors are confident in the economy, they will buy stocks. Stocks are how ...view middle of the document...
According to the Federal Reserve website under the chair’s leadership, the board’s responsibilities include analysis of domestic and international financial and economic developments. The board also supervises and regulates the Federal Reserve Banks, exercises responsibility in the nation’s payments system, and administers consumer credit protection laws (including the Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts).
The board also plays a major role in the supervision and regulation of the U.S. banking system, including state chartered banks that are Federal Reserve System members, bank holding companies, member bank’s foreign activities, and foreign bank’s activities in the U.S. (Board of Governors of the Federal Reserve System, 2013).
By law, the Chairman reports to Congress twice annually on the Federal Reserve’s activities and monetary policy and testifies before Congress on numerous other financial issues.
Changes in interest rates can have both positive and negative effects on the U.S. markets. When the Federal Reserve Board (the Fed) changes rate at which banks borrow money, this has a ripple effect across the entire economy. Interest rates affect the economy by influencing stock and bond interest rates, consumer and business spending, inflation, and recessions. However, it is important to understand that there is generally a 12 month lag in the economy, meaning that it will take at least 12-months for the effects of any increase or decrease in interest rate to be felt. By adjusting the federal fund rate, the Fed helps keep the economy in balance...