The government influences the capital markets in ways other than regulation too. The
Federal Reserve System,
or Fed, controls the money supply. The Fed decides to increase or decrease the money supply in an effort to keep the economy expanding without running into
inflation
problems or
recession.
When the Fed increases the amount of money in circulation, interest rates drop. That means individuals are more likely to take loans, since they’ll pay less interest, which makes borrowing more affordable. It also means that individuals might be more likely to invest in stocks, since the interest they earn on money left in a savings account has dropped, making the potential returns of the stock market more attractive.
Shifting focus
When the Fed decreases the money supply, interest rates rise, which may spur investors to turn to bonds, or to stash their money in savings accounts. That may shift the trend of the capital markets for a time. But while the Fed’s monetary policies do affect the economy, it is an indirect relationship. That means there may be delays between when a policy shift is implemented and when evidence of the desired result emerges.
Professor Samuel L. Hayes,
Harvard Business
School
Professor 
