US Economy
US ECONOMY
The United States has long dominated the global economic landscape, holding the title of the world’s largest economy since the late 19th century. In 2018, it reported a nominal GDP of $20.58 trillion. Its economic strength stems from a dynamic workforce, cutting-edge innovation, and a diverse industrial base that ranges from finance to technology.
When adjusted for purchasing power parity (PPP), however, the U.S. falls to second place behind China. In 2019, America’s GDP in PPP terms was $21.44 trillion, while China’s stood at $27.31 trillion. PPP comparisons offer a clearer picture of living standards and consumer purchasing ability.
As global markets shift, forecasts indicated that by 2023 the U.S. would reach a GDP of $24.88 trillion, with China narrowing the gap at $19.41 trillion. This trend reflects China’s accelerated growth and increasing influence in global trade and investment.
% SHARE OF THE GLOBAL ECONOMY
THE FEDERAL RESERVE
WHAT IS A CENTRAL BANK?
A central bank is the chief authority that manages a country’s currency, money supply, and interest rates. Unlike private institutions, central banks serve as the primary regulator of the financial system, ensuring stability and guiding economic strategy.
Central banks often operate independently of political interference, even though their legal authority stems from the government. They have the sole right to issue national currency and act as a pivotal institution during financial disruptions.
Their exclusivity in issuing legal tender distinguishes them from other banks. While commercial banks create credit through loans, only central banks can create physical money and implement nationwide monetary strategies.
UNDERSTANDING CENTRAL BANKS
The functions of central banks differ by nation, but their fundamental roles include the following:
Currency Management and Interest Rate Policy: Central banks steer the economy by setting benchmark interest rates and controlling inflation. Higher interest rates typically reduce borrowing and cool inflation, while lower rates promote spending and growth. Many target a stable inflation range between 2% and 3%.
Oversight of the Banking System: They enforce rules that maintain financial discipline, such as liquidity requirements, capital adequacy standards, and safety nets like deposit insurance. They also play a role in managing the country’s exchange rates and monetary reserves.
Crisis Response and Stabilization: In financial emergencies, central banks provide liquidity to struggling institutions and sometimes finance government obligations. By purchasing national debt, they help inject money into the economy without increasing taxes.
THE FEDERAL RESERVE
In the United States, the Federal Reserve—commonly known as the Fed—is the central banking authority. Established in 1913, it was created to bring stability to a financial system prone to crises and inconsistent credit availability.
The Fed can influence the amount of money in the economy by adjusting the reserve ratio—how much cash banks must hold versus what they can lend. Lowering this ratio expands credit availability; increasing it tightens access to funds.
Another powerful tool is the discount rate. Reducing this rate makes it cheaper for banks to borrow, thus encouraging lending and spending. However, excessive easing can stoke inflation, so the Fed must act judiciously.
Through open market operations, the Fed buys or sells U.S. Treasury securities. Buying injects liquidity into the banking system, while selling extracts cash, helping to control inflation and manage economic momentum.
STRUCTURE OF FED
DOLLAR INDEX
WHAT IS U.S. DOLLAR INDEX – USDX?
UNDERSTANDING U.S. DOLLAR INDEX – USDX
The index is composed of six major currencies: Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swedish Krona (SEK), and Swiss Franc (CHF). The Euro has the heaviest weight, accounting for nearly 58% of the index.
Launched in 1973 following the collapse of the Bretton Woods system, the USDX was introduced to monitor the dollar’s value in a floating currency environment. The index began at a baseline value of 100.
Historic peaks and troughs reflect global financial conditions. It hit a high of 164.72 in 1985 and a low of 70.698 in 2008. By March 25, 2020, it stood at 100.35—indicating relative stability since inception but volatility in between.
While the current composition hasn’t changed since the Euro’s introduction in 1999, shifts in global trade may prompt a revision. Given China and Mexico’s growing trade with the U.S., future updates could include the Chinese Yuan (CNY) or Mexican Peso (MXN) to better reflect economic realities.
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