The Federal Reserve System

Published Date: 02 Nov 2017

[Author]

[Institution]

The U.S financial system includes the International Monetary Fund’s (IMF) which is an International organization responsible for fund regulation in the global economy and holds a major role in the economic activity regulation.. This research paper aims to discuss the complex behavior of U.S finance regulation bodies, its effects on domestic and global level, its Federal Reserve system structure and effectiveness and also the impact of fluctuating Interest rates and exchange rates.

Financial Markets Functions and Its Impact On economy, business and Individuals:

A financial system included financial intermediaries which perform the function of channelizing funds from agents who have saved it to the people who use it for investments or other purposes. U. S is a developed economy and its currency value of the dollar is given a high regard in the Global economy. The U.S financial policy emphasizes in lending money and earning interest on it rather than using it for domestic industrial growth.

Efficient Financial markets are critical to achieving economic and social goals. They ensure that short-term and long-term debts and investments are regulated properly with effective application of monetary policy. The U.S stock exchange, central banks and regulatory bodies play a vital role in money mobilization in the economy, a large number of the multinational firms of the world are working under this economy. The aggregate assets of the central bank make 30% of the global GDP.

The market for corporate control has been very active in the U.S. Target firms are almost always bought at a premium, thereby creating value for the shareholders of the target formats leads us into the dark side of this mechanism for corporate control. An acquirer may simply be wasting corporate resources overpaying for acquisitions in order to create a business. Globalization dramatically increased cross-border mergers and acquisitions. (Denis, Denis & Yost, 2002). This has proven beneficial for target companies but value reducing for the U.S domestic firms due to investment outflows.

The increase in unemployment in U.S, drastic increase in imported goods rather than producing own goods has lead to government spending per household exceed median household income. The basic necessities of life and increased inflation in the U.S economy has resulted in decreased standard of living and widespread frustration among citizens, this is all a result of faulty monetary policy which has deprived the locals from their rights. U.S seems more interested in capturing the world market rather than strengthening its own, the economy is under a serious recession threat if it doesn’t change its policies.

THE FEDERAL RESERVE SYSTEM:

The Federal Reserve implements U.S Monetary Policy by affecting conditions in the market for balances that depository institutions hold at the Federal Reserve Banks by conducting open market operations, imposing reserve requirements, permitting institutions to clear balances. Through its control of the federal funds rate, the Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives. (Federal reserve system: purpose and functions)

The chairman of the Board of Governors of the Reserve system is the head of the Central Bank, known as the ‘FED Chief’ , he is the acting executive officer responsible for shaping up the Board of Directors who shapes up the Monetary policy in the U.S. The current Chairman is Ben Bernanke.

The present Federal reserve system of U.S is assumed to be inefficient, its mismanagement has led the Government to the brink of Bankrupcy, it is draining wealth from the states reserve to ultra-wealthy organizations who are lending it to other countries and receiving interest payments. The national debt has increased to a considerable level and the Government has to ask for money from the FED. The federal reserve is lending money to the megabanks who in turn are buying government securities, leading to the devaluation of the Dollar value against other currencies. The fluctuating national interest rates are creating instability in the economy.

The Federal Reserve is getting into the hands of wealthy private ownership controlling National Money supply and the elected members are having enormous power which they are using for their personal benefits. The policies of the Chairman has eliminated the minimum funds requirement for commercial banks and nor are they any more answerable to the government. This all has led to instability in global economic activity worsening monetary scenario.

Interest Rates influence:

The interest Rates are the most powerful weapon in the Fed’s arsenal which can encourage or discourage investment, impact Bonds and Stock market. With fluctuating interest rates investors in U.S have a wide variety of investment options, the dividend yield on the Certificate of Deposit or Treasury Bonds has the highest rate of return. When interest rates are rising the customers and businesses both cut off spending causing earning and Stock prices to fall. As interest rates fall, it becomes easier to borrow money and many companies will issue new bonds to finance expansion. This will cause the demand for higher-yielding bonds to increase, forcing bond prices higher. Issuers of callable bonds may choose to refinance by selling their existing bonds so they can lock in a lower interest rate. (Chris Seabury, 2011)

In the short run, decrease in the interest rate of the U.S dollar exchange rate lowers the prices of U.S produced goods and a rise in foreign goods prices, this encourages selling in the domestic market, an overall increase in Aggregate demand and supply internationally and locally, resulting in a higher level of economic growth. It attracts foreign and local industrial growth benefitting the global economy.

Foreign exchange rate impact on Business Decisions:

Irokkee (2009) Fixed factors that impact currency exchange rates are generally identified as inflation, interest rates, and trade value. Trade value has to do with the ratio of business and service trading that takes place between the two countries that issue the currency. In the event that one country purchases more goods and services from a given country than it imports to that same country, the value of the each country will reflect that difference.

Exchange rate affects the economic decisions as it changes the price of exchanging or investing in other countries. When the exchange rate of U.S currency rises against another currency, they are able to buy more goods from the foreign country and their exports also become costly for the other country. Exchange rates also alters the investment and savings decisions of producers. When in U.S dollar depreciates , emerging competitive firms take the benefit and buy goods from them and also invest in their economy by saving or performing industrial activities. As, the currency appreciates the domestic producers will want to produce and sell more or would be determined to establish business activities in other nations while on the other hand when the currency depreciates foreign investors will be interested to carry business transactions with U.S.

Conclusion:

U.S financial system has a serious responsibility towards the global economy and it should take effective managerial steps to stabilize its financial standing and end the corruption in its system.