Many people know that each country’s economy has a government body that acts as its guardian. This body is responsible for implementing policies that are designed to keep its country’s economy operate smoothly. In the United States, the government body responsible for implementing such policies is the Federal Reserve. This financial institution is popularly known as the Fed. It is considered as one of the most powerful organizations in the globe since it oversees the world’s largest economy.
The U.S. Federal Reserve has a wide scope of influence to other economies. Its policies can directly affect different markets in the world. Because of this, it has established itself as one of the primary topics of discussion and speculation among investors.
As an investor, it is essential to gain basic knowledge about the Federal Reserve. But unfortunately, a number of them do not understand how and why this institution involves itself in America’s economy.
- How does the Fed affect the global market?
The Federal Reserve sets America’s monetary policy. It supervises and regulates banking institutions in order to maintain stability in the financial system. It also provides financial services to banks, the U.S. government and foreign institutions.
Contrary to what most people believe, the Fed does not regulate the economy by affecting the supply of money. Instead, it preserves a targeted interest rate and controls the needed flow of money to keep the desired level of rate. This institution is responsible for guiding the U.S. economy. It raises and lowers the interest rates that borrowers pay to lenders.
The primary role of the Fed is to stabilize its economy, particularly the growth of its country’s currency. Therefore everything that this central bank does will affect the U.S. dollar (USD). The Fed can cause movement in the USD by either increasing or decreasing the interest rates.
If the Fed decides to increase the interest rates of the USD, investors will have more reason to invest in it. On the other hand, if it decides to decrease the interest rates, then investors will have less reason to invest in the USD. Thus, whatever the Fed decides to do will affect the demand and value of the USD.
Keep in mind that America is the largest economy in the world. Due to the development of economics, every economy in the world is now dependent on one or more other economy. Because America has the world’s largest economy, any changes the Fed makes which affects the U.S. economy will also affect the global economy.
For example, when the Fed increases the interest rates of USD, the value of the USD will also increase. This will then lead to pressure on the global economy since most assets in the forex market and commodities market are priced with USD. Currencies, gold, oil, silver, wheat, and corn is priced with USD. If the value of the USD rises, currencies and commodities outside America will increase in price.
The influence of the U.S. Federal Reserve is so immense. Its decisions and policies do not only affect the U.S. economy but also the Global economy. Any decision made by this central bank leads to a chain reaction, it causes movement in the world market. Therefore, whenever this institution speaks, it is wise for every traders and investor to listen.
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