Hi All,
Here is the forum to post your blog-post 2. Milestone 3 comprises of reading from Weeks 5 and 6 (Chapters 34-37)
Include these key requirements in your submission:
How does the policy of the Federal Reserve bank as well as the Central bank of its key market affect the company’s economic growth? Remember, if your home market is not the US, you would need to use their Central market and not Federal Reserve Bank.
Effect of fiscal policies of the home country and one key market on the company.
Paper length should be at least 5 pages (including cover and reference pages).
Use a minimum of 3 professional references (do not use Wikipedia, blogs, vlogs or any pedias)
Paper should be written in APA including Times New Roman, 12 font, double space, paragraphs indented, subheadings used.
Note that references provided must have corresponding in-text citations within the paper
Milestone 3
Gregory Churchill
Regent University
ECON 230 Macroeconomics
Professor Bajah
24 April 2022
How does the policy of the Federal Reserve bank as well as the Central bank of its key market affect the company’s economic growth?
Banking profitability has an intimate relationship with GDP growth rate because banking revenue comes primarily from transaction fees and interest payments on loans from consumers and corporations. “In theory, real GDP growth [positively affects] banking performance through three mains channels: net interest income, loan losses improving, and operating costs” (Combey & Togbenou, 2017). A higher GDP implies lower unemployment and increases in loan drafting and consumer deposits. As a result, banks will have more loans to collect interest on and fewer consumers defaulting on existing loans. The relationship between a banks’ operating costs and GDP growth rate is ambiguous, although it follows that with an increase in banking activity, more banking transactions per hour results in lower operating costs.
The Federal Reserve Bank, or the “Fed”, is responsible for conducting national monetary policy, supervising and regulating banks, maintaining stability of the financial system, and providing certain financial services (The Fed - What Is the Purpose of the Federal Reserve System?, 2016). The US Federal Reserve Bank is the central bank of the United States, JP Morgan’s key market, and influences private bank interest rates using open market operations by buying and selling bonds to affect the money supply (Cowen, Pg. 738). JP Morgan Chase must adjust interest rates according to the money supply controlled by the Fed. Another factor that affects interest rates, and consequently profitability, of JP Morgan is the inflation rate. “Higher interest rates are set by Central Bank to control inflation. With higher interest rates, borrowing costs are more and hence consumers save more rather than spending which slows the economy and decreases inflation” (Thakur, 2018). A lower inflation rate means lower interest rates, and reduced profitability for JP Morgan. Another effect of low interest rates is that it encourages consumers to borrow more, which will increase profitability, especially when interest rates return to higher levels.
What is the effect of fiscal policies of the home country and two key markets on the company?
When talking about international business, one of the ratios to keep in mind is the exchange rate between the home country and the country business is conducted in. “A lower exchange rate promotes competitiveness of firms because goods manufactured prices at home decline and foreign demand raise. As a result, loans and deposits increase as well as banks’ profits. But a lower exchange rate may also reduce domestic consumer purchasing power, as imported goods become more expensive. This situation may increase loans losses and may have negative effects on bank’s profitability” (Combey & Togbenou, 2017).
JP Morgan is headquartered in New York City but operates globally. The two largest markets that JP Morgan conducts business in internationally are Europe (excluding the UK), and Japan. In 2017 the US lowered the corporate tax rate from 35% to 21%, which improved profitability of all companies based in the US. The benefits of a corporate tax cut don’t end with corporations, “Some of the gains from a corporate tax cut will flow to workers and consumers” (Cowen, Pg. 785).
When a company operates in many countries simultaneously taxes can get messy. JP Morgan earns roughly 5% of their income from Japan, where they are required to by corporate taxes on their earnings made within Japan. “A foreign corporation with a permanent establishment (PE) in Japan is liable for corporate income taxes only on the income attributable to the PE” (Japan - Corporate - Taxes on Corporate Income, 2019). JP Morgan’s largest market outside of the US is Europe (excluding the UK) at 12% of the company's market share. Europe consists of many countries and tax codes. A tax cut, or hike, in another company will affect JP Morgan’s profitability by the percentage of income from that country.
References
Combey, A., & Togbenou, A. (2017). The Bank Sector Performance and Macroeconomics Environment: Empirical Evidence in Togo. International Journal of Economics and Finance, 9(2), p180-188. https://doi.org/10.5539/ijef.v9n2p180
Guide to the Markets | J.P. Morgan Asset Management. (n.d.). Am.jpmorgan.com. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
The Fed - What is the purpose of the Federal Reserve System? (2016, November 3). Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/faqs/about_12594.htm
Thakur, M. (2018, November 26). Inflation vs Interest Rates | Top 5 Valuable Differences To Learn. EDUCBA. https://www.educba.com/inflation-vs-interest-rates/
Japan - Corporate - Taxes on corporate income. (2019). Pwc.com. https://taxsummaries.pwc.com/japan/corporate/taxes-on-corporate-income