Impact of Financial Markets on Economy, Businesses, and Individuals - Assignment Example

Impact of Financial Markets on Economy, Businesses, and IndividualsIMPACT ON ECONOMYFluctuations in the financial markets have a severe impact on the economy of a country. Financial market instability causes individuals and businesses to lose confidence in investment and thus the environment becomes risk averse and conservative. On the plus side, many markets offer better returns in times of uncertainty like the bonds market. IMPACT ON BUSINESSESAccess to credit is one of the key business factors that are influenced by financial markets.

When the financial markets do not perform well, they affect the investment levels adversely. Businesses are unable to raise capital for their business operations leading to financial crunches.IMPACT ON INDIVIDUALSRetirees depend highly on the returns of their pension funds. Thus, a fall in stock prices may lead to a loss to a portion of the syndicated investment of the funding in the stock market, reducing the overall return and giving them less purchasing powerTHE FEDERAL RESERVE OF UNITED STATESThe federal reserve of the United States is the central bank of the country which facilitates the banking system of the country.

It provides services of account maintenance, payment and collection services, circulation currency and transferring funds. For the government it acts as a fiscal agent by honoring treasury check, electronically processing transactions and handling the issuance, transfer and redeem of government securitiesThe board of governors is appointed by the president to serve 14 years of office. Their primary responsibility includes the formulation of the monetary policy, approving the currency circulation limitations and setting cash reserve requirements for the commercial banks (FederalReserve.gov, 2014).

The board focuses on developing swift payments system in the country and implementing laws that are related to consumer credit. It sets marginal limits to the use of credit or security purchase and reserves regulatory and supervisory rights over the banking system. The chairman of the Federal Reserve is appointed by this board of governors as well. The chairman of the Federal Reserve is one of the active board members and assumes the role of the head of the central bank. Under his leadership the board of governors of the Federal Reserve carries out their responsibilities of analyzing, interpreting and regulating the financial system of the country.

The chairman is required to report to the congress bi-annually to relate the activities and decisions of the central bank. He maintains contacts with the president’s financial advisory council and other economic officials. The chairman also maintains membership of leading financial institutions internationally like the IMF, BIF etc.The interest rates play an important role in the US economy. The Federal Reserve sets the rate at which the banks can borrow which reflects their lending ability.

The lending ability affects the consumer/business borrowing, investment, saving and spending patterns and result in phenomena like recession or inflation.EFFECT OF INTEREST RATESHigh interest rates give higher returns to lenders. Thus, if the interest rates are high the investment in the country will go up, affecting the overall value of the dollar. Increase in the exchange rate of dollar has several implications on the demand for the currency in the international market. The Asian financial crisis of 1997-98 can also be attributed to this phenomenon, when Asian markets invested in foreign currency borrowing ultimately decreasing the value of their own currency and being unable to pay their foreign currency debts (Goldstein, 1998).

This had a domino effect in the Asian markets and as a result the whole financial system in the region was affected adversely.REFERENCES:FederalReserve.gov,. (2014). The Structure of the Federal Reserve System. Retrieved 15 July 2014, from http://www.federalreserve.gov/pubs/frseries/frseri.htmGoldstein, M. (1998). The Asian financial crisis (1st ed.). Washington, DC: Institute for International Economics.