Complexities of the U.S. Financial System
The U.S. financial market is very complex and is affected by different factors including economic factors and government regulation. The financial system has a substantial influence on individuals, businesses and the economy. The financial market affects the economy through their contribution to gross domestic product and employment. In 2014, the insurance and finance sectors employed 5.87 million people, representing approximately 5.2% of the non-farm private sector employment (Bureau of Labor Statistics, 2014). The financial market also offers credit to business organizations, thereby allowing them to obtain sufficient financial resources for investment purposes. The market equally offers financing to individuals, which permits them to acquire homes and other assets without saving the entire amount in advance. The significance of the U.S. financial market became obvious during the global financial crisis. During the crisis, it became very difficult for the financial market to extend loans to businesses and individuals, pushing the U.S. economy into a recession.
The Federal Reserve has several objectives in the U.S. economy. These include maximization of employment, stabilization of prices, and facilitation of long-term interest rates. The Fed`s most important roles include supervision and regulation of banking institutions, ensuring the U.S. financial system is stable, and implementation of monetary policy. The chairman of the Federal Reserve commonly referred to as chairman the Board of Governors of the Federal Reserve System leads the American central banking system and is a board member of the board of governors of the Federal Reserve. As the head of the institution, the chairman influences the direction the country takes in terms of monetary policy (The Federal Reserve Bank of New York, 2014). Under the law, the chairman reports to congress biannually to inform law makers on the operations of the Federal Reserve and U.S. monetary policy. Under the chairman`s leadership, the fed analyses financial and economic developments both domestically and internationally. The Federal Reserve Board also regulates and supervises activities of the Federal Reserve Bank and oversees the operations of the payments system in the country. Moreover, the board administers consumer credit protection laws and is the primary regulator of the American banking system (Board of Governors of the Federal Reserve System, 2014). The Federal Reserve chairman and the board are effective to a large extent in the current economic environment. Both parties have managed to lead the American economy out of the worst recession by implementing the correct monetary policy and programs such as TAFL that have increased demand in the American economy.
Changes in interest rates significantly affect the American financial market. The impact can be positive or negative. For instance, when the Federal Reserve increases the rate at which it lends to banks, commercial banks also increase the rates at which they lend to their customers. The high interest rates discourage borrowing, leading to less consumption and investment. High interest rates equally affect the interest rates on bonds (Melicher & Norton, 2011). For instance, when bonds offer higher interest rates, they become very attractive to investors leading to more bond holdings in the U.S. With regard to the global financial environment, extended periods of low interest rates in the global financial market, especially in developing markets can compel investors to put their money in risky investments as a strategy to enhance their yields (Melicher & Norton, 2011).
Board of Governors of the Federal Reserve System. (2015). Retrieved on 13 April 2014 from: <http://www.federalreserve.gov/>
Bureau of Labor Statistics. (2015). Finance and Insurance: NAICS 52. Retrieved on 13 April 2014 from: <http://www.bls.gov/iag/tgs/iag52.htm>
Melicher, R. W. & Norton, E. A. (2011). Introduction to finance (14th Ed.). Hoboken, NJ: John Wiley & Sons.
The Federal Reserve Bank of New York.(2015). U.S. Foreign Exchange Intervention. Retrieved on 13 April 2014 from: <http://www.newyorkfed.org/aboutthefed/fedpoint/fed44.html>