Final Report

Introduction
Finance industry is encompasses all businesses that provide money management services.
These services include banking, insurance, trusts, mortgage, brokerage, and investment funds.
America’s finance industry, mainly based in major cities such as New York City, is highly
developed. It is also the biggest in the world.
Size and/or Growth of Industry
Finance sector has grown over the years to become one of the most important sectors in
the US economy. Companies that provide financial services are collectively the largest in terms
of equity market capitalization and earnings. However, they are outperformed by other sectors in
terms of number of employees and revenues. As of 2018, the sector’s GDP was
$3,029,070,000,000. This was a 6.22% increase from 2017’s $2,840,472,000,000 (Bureau of
Economic Analysis, 1). The sector’s growth rate was higher than the overall GDP growth of the
US economy which was 3.1%. Thus, while the finance sector is known for slow growth rates, the
last one year was one of relatively high growth rate. Overall the sector is around 15% of the
national GDP (Bureau of Economic Analysis, 1). While this figure is relatively small, it does not
fully capture the importance of the finance sector to the economy. When the finance sector is not
in good health the economy suffers and vice versa.
Macroeconomic Indicator or Policy and Its Importance and Impact
The macroeconomic policy that the finance industry should keenly monitor is the Federal
Reserve’s monetary policy, particularly interest rates. The finance sector is extremely sensitive to
these rates. Unlike the rest of the economy which reacts to changes in interest rates around a year
after the changes have been effected, the finance sector often responds to the changes

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immediately they are announced (Hamilton et al, 2). This hypersensitivity to interest rates is due
to the big impact that the rates have on the sector.
When the Federal Open Market Committee (FOMC) meets it sets federal funds rate. This
rate is one at which lend and borrow from each other. While the rates are strictly targeted at
interbank lending and borrowing, they often have wide-ranging effect not just on the finance
sector but on the whole economy (Hamilton et al., 2). This is because the interbank lending rate
is the one that banks use to set their own interest rates. Thus, the higher this rate is, the higher the
interest that banks charge on loans. Since banks play a central role in the supply of money in the
economy, when the rates set are high, the supply of money in the economy reduces. The federal
funds rate can, therefore, be used to control a lot of factors in the economy, such as inflation and
spurring of economic activity when the economy is depressed.
When the FOMC last met in October, 2019 they agreed to reduce federal funds rate’s
target range to 1.5%-1.75% (Trading Economics, 3). In essence the decision sought to increase
the supply of money to the economy. Such decisions are usually made when there are no fears of
inflation rising and when the economy is experiencing slow growth. In the case of the latest
decision, the FOMC cited the need to offset the effects of worrying trade developments and weak
global growth on America’s aggregate demand (Trading Economics, 3). Reducing of the interest
rates is, therefore, meant to increase public speaking which is hoped to lead to stronger economic
growth.
While the decision is likely to have a positive impact on other sectors of the economy, its
impact on the finance industry is going to be negative. Financial institutions such as banks
benefit when interest rates are high, not low. With high interest rates they can charge more for

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loans that they provide customers thus making more profits. Thus, with reduction of interest
rates, the finance sector is going to record smaller profits.
Recent Trend
The slashing of interest rates follows a trend that began in June. That is when the FOMC
first reduced the interest rates after keeping them unchanged for close to seven months (Trading
Economics, 3). As long as inflation does not rise and economic outlook remains weak, it is
highly likely that the interest rates will keep being reduced. In an environment of low interest
rates, the financial sector is likely to have slow growth rate.

Figure 1: Federal Funds Rate Between April to October, 2019
Conclusion
Macroeconomic policies usually have a major impact on large segments of the economy.
In the case of federal funds rate, the impact it has is almost on all sectors of the economy.
Nowhere, however, is the impact as pronounced as in the finance industry. As this paper has
shown, the industry has in recent times been growing at a faster rate than the overall GDP. The
growth could have been due to high interest rates that existed until June in 2019 when they began
reducing. With the rates reducing, the high growth levels that the industry has experienced in

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recent times are likely to end. Thus, the finance sector is likely to start experiencing relatively
slow growth rates.

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Sources

1. Bureau of Economic Analysis. 2019. GDP-by-Industry.
   https://apps.bea.gov/iTable/iTable.cfm?ReqID=51&step=1
2. James Hamilton, Ethan Harris, Jan Hatzius, and Kenneth West. 2016. “The
   equilibrium real funds rate: Past, present, and future.” IMF Economic Review 64,
   no. 4
3. Trading Economics. 2019. United States Fed Funds Rate.
   https://tradingeconomics.com/united-states/interest-rate