General Overview of the US Economy

The United States enjoys one of the most developed economies. Its GDP (Gross Domestic Product) for year 2006 is over $13 trillion. This is the highest GDP in the world, surpassing countries like Japan, Germany and UK.

Investors have concentrated their assets in the US since it enjoys the world's most developed and liquid equity and fixed income markets. Since the foreign direct investment represents a big percentage of global net inflows to the US, if investors decide to withdraw their assets, it will have a significant impact on the values of the US assets and the USD respectively.

The US also enjoys a high import and export volume. One of the factors that greatly contributes to this is the size of the country itself. However, the US suffers a trade deficit, because it is importing more goods and services than it is exporting. Additionally, the US is dependent on capital flows, which results in the dollar's sensitivity to any change in these capital flows. Thus, in order to avoid a decrease of the USD, the US needs to attract more than 1 trillion of capital inflows every day.

Another characteristic of the US economy is its status as the largest trade partner of many countries. It trades largely with Mexico, Canada, Japan and many others.

The US economy is generally described as being oriented toward the service sector. The introduction and development of different technologies and the Internet have led to the consistent increase in the productivity of the US. Despite the relative downturn that the economy is currently experiencing, the productivity has not been influenced, which leads to many experts claiming that the economy is entering a new stage.

The central bank of the United States is the Federal Reserve Board, commonly referred to as only the Fed. Their major responsibility is the setting, implementing and monitoring of different monetary policies. A part of the Fed is the Federal Open Market Committee (FOMC), which includes 12 members. Within the FOMC, seven Governors of the Federal Reserve Board and five presidents of the twelve district reserve banks hold voting rights on important issues. Each year approximately 8 meetings are held for the purpose of establishing interest rates. The decisions made at these meetings are closely watched since they may have a significant impact on the forex market.

The Fed is characterized as being relatively neutral and independent of political influence. It enjoys high autonomy regarding the monetary policy setting. Two times per year (in February and July) it issues the Monetary Policy Report. This report is followed by the Humphrey-Hawkins testimony. The latter includes answers to questions of the Congress and the Banking Committees given by the chairman of the Fed. Data you can find in the report includes information on inflation, unemployment, and expected GDP growth.

The basic goals of the Fed include:

• Price stability
• Sustainable economic growth

The achievement of these long term goals is done through the application of different monetary policies in order to set unemployment and inflation into reasonable limits and enhance economic growth.

In order to achieve these, the Fed tends to execute open market operations, such as the buying of government securities. This is done in order to decrease interest rates. On the other hand, the selling of government securities leads to increase in interest rates. Whichever strategy is applied depends on the economic conditions the Fed wants to counteract.

Another way to influence market conditions is through the control of fed funds. These are the resources the Fed has available for borrowing to member banks. When inflation rates rise, the Fed will increase this rate. On the other hand, if the Fed wants to encourage growth, it will decrease this rate.

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