US Monetary Policy And Its Impact On Financial Market

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ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

The financial system and central banking cannot be understood independently of one another. They form a symbiotic whole. On the one hand, central banking policy choices and the regulatory framework affect the financial system. On the other hand the effectiveness of central banking policies is determined by developments in the financial system. Central banks try to reach their targets mainly through exerting influence on the quantities and prices of financial assets by using their existing tools within the given regulatory framework. As Friedman (2000) puts it moving financial markets to an extent sufficient to affect non-financial economic activity is precisely what central banks seek to do. The aim of this research is to examine the impact of US monetary policy on financial market. Secondary research has been used as research technique for this research. The internet publications, studies on similar subjects and article have all been considered for this research. This research began with existing literature detailed analysis. The final conclusions were drawn from the analysis of secondary data available on the internet and other secondary sources. The aim of the monetary policy is to keep the price stable. In United States, the Central Bank (Fed) operates under such mandates that refer to some additional objectives like, maximum sustainable growth, full employment, stable exchange rates and stable interest rates. In order to meet these additional objectives, Fed intervenes the financial market. Thus, monetary policy influences financial markets which further influences real economy.

Table of Contents

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Background of the Study1

Research Aims and Objectives4

Research Questions4

CHAPTER 2 : LITERATURE REVIEW5

History5

Money supply7

Central Bank objectives and instruments8

CHAPTER 3: METHODOLOGY10

Research Design10

Search Strategy11

CHAPTER 4: DISCUSSION AND ANALYSIS12

Impact of Monetary Policy of Stock Market12

How does a Central Bank Exert Influence on the Real Economy?14

Interest Rate Channel16

Credit Channel17

Other Asset Prices (Exchange and Stock Rates) Channels20

CHAPTER 5: CONCLUSION24

REFERENCES25

Chapter 1: Introduction

Background of the Study

Since the 1980s, financial systems in developing and developed countries have been evolving with enormous speed. Most restrictions on the financial system have been lifted. Many potentially restrictive laws have been interpreted for the benefit of financial markets. Financial integration reached unprecedented levels. Many new financial techniques and products were developed. Major financial markets have experienced a transformation into a much more complex, more opaque and bigger system.

During this period, central banking in many countries underwent several important changes too. Before this period, central banks used to utilize various direct and indirect tools with the help of a relatively firm regulatory framework. These instruments include required reserve ratios, direct lending, discount window operations, margin ...