BRIEF ANALYSIS OF MONEY & CAPITAL MARKETS IN THE U.S.

This research examines the money and capital markets in the United States for the five-year period 1995-1999 inclusive. As a part of this examination underlying reasons for shifts in interest rates and interest rate differentials are sought.

Several factors, including global market forces, the current and expected rates of inflation, and Federal Reserve implemented monetary policy, affect the demand for and supply of money in the economy. The demand for and the supply of money, in turn, affects interest rates and interest rate differentials, and, in turn, the demand for and the supply of money are affected by interest rates and interest rate differentials. Thus, the relationships between interest rates and interest rate differentials, on one hand, and the demand for and the supply of money, on the other hand, are very much interactive in character (Pansard, 1999).

Short-term interest rates are affected by the actions of both the Federal Reserve and other market participants in the money and capital markets. The Federal Reserve, through the development and application of monetary policy, influences short-term interest rates by setting the rate of interest that it charges banks for borrowing from the Federal Reserve and by setting the rate at which banks borrow from one another (Soderlind & Svensson, 1997).

The interest rates set by the Federal Reserve, thus, ser

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ly increase. This latter situation has prevailed throughout the inclusive 1995-1999 period as a trend, although, as is true in all periods of any substantial duration. Fluctuations occur in market indexes. By way of illustration of the capital market experience for the inclusive period 1995-1999, however, the Dow Jones Industrial Average on 25 September 1996 closed at 5,877.4. On 11 October 1999, the Dow Jones Industrial Average closed at 10,648.2. The 52-week high from October 1998 to October 1999 was 11,365.9, while the 52-week low was 7,467.5 ("Data Bank," 1999). The 52-week high and low levels for the Dow Jones Industrial Average illustrate the extent to which the capital markets fluctuate. The closing values of the index on 11 October 1999 and 25 September 1996, however, illustrate the generally upward trend that has characterized the capital markets in the United States throughout the inclusive period 1995-1999 (Makien, 1999). The stock market is a barometer of confidence in the future of the economy. When confidence is high, the stock market tends to rise, increasing the wealth of those with funds invested in the market. As wealth rises, so too does consumption, causing the economy to expand. Historically, stock
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Approximate Word count = 1474
Approximate Pages = 6 (250 words per page)