The U.S. financial system and its many complexities which are impacted Research Paper

The U.S. financial system and its many complexities which are impacted by several environmental factors, including federal regul - Research Paper Example The Federal Reserve situates the monetary policy of the nation in order to encourage the stable prices, objectives of highest employment, and reasonable interest rate for long-term basis. The biggest challenge for all the policy makers, is that pressure among the set goals might take place in short run as well as the information with respect to economy is accessible only with a delay and chances are that it might be inadequate. Financial markets assist in effectively directing the flow of investments and savings within the economy which facilitates the growth of capital along with production of products and services in different ways. The ideal blend of strong institutions and financial markets as well as different range of financial instruments and products, perfectly fits with the lenders and borrowers’ need and hence the entire economy. Financial Markets and Institutions A financial market includes bonds or trade stocks, an instrument includes derivatives and bank CDs and i nstitutions includes banks, insurance companies and funds. They all offer opportunities to investors so that they can specialize in diversify risks, specific market and/or services, or both and can exchange financial assets (Fabozzi, 2002). How Economy is affected by Monetary Policy? The preliminary connection in the chain among the economy and monetary policy is market for stability which takes place at Federal Reserve Banks. At reserve banks, depository institutions have their accounts, and they vigorously trade the balances which are kept in the accounts with an interest rate termed as federal funds rate. Federal Reserve has control on federal funds rate with an influence on demand and supply at Reserve Banks. Any change in expectation or in the rate of federal funds can affect other short and long term rate of interest, stock price and the value of dollar with respect to foreign exchange. This in turn affects spending decision of business and households which ultimately distress growth in the economy and aggregate demand. In Federal Reserve Act, the targets of monetary policy are shared which states that the Committee of Federal Open Market and the Board of Governors must look forward to encourage effectively the targets of highest employment rate along with stable prices and interest rates. When the prices are constant or stable and are expected to remain the same, inflation has no effect on the process of services, goods, labor and materials and thus helps in contributing in higher living standard. This also helps in capital formation by helping in saving because when threat of attrition of asset values minimized, business got the opportunity to invest more whereas households are encouraged for more saving. Influence of Interest Rate on U.S. and Global Financial Environment Interest rates are always been proposed as policy guide, not only they serve the role of spending decisions also because interest rates information is accessible on the basis of real- time. The proper level of rate of interest will differ with fiscal policy stance, changes in spending pattern of business and household, global economic development and productivity growth. Modifications in interest rate on long-term basis will affect on stock prices, which will create a remarkable effect on the wealth of household. Investors keep in line both their investment returns on