Tranquilizer for Nervous U.S. Financial Markets

Serious money is needed to prevent the danger of inflation in the United States. However, the increase of the prime rate by a quarter of a percent is only symbolic. Nevertheless, the financial markets are scared. Chairman of the Federal Reserve Bernanke has to proceed cautiously now, and he has to keep an eye on unemployment.

Only half a year ago, who would have predicted that America would be introducing a turn in interest rates by February 2010? Surprisingly early, the Fed is beginning to take liquidity out of their system. The signal for the markets is obvious: The government wants to address the dangers of inflation in due time.

More than $1 trillion in bank reserves are currently sitting in the accounts of the Federal Reserve. Before the financial crisis, it was only $40 billion. If the money reserves were to retrieve this massive amount of money and pump it via loans into the economy, it could potentially boost prices.

The consequence would be a wave of increasing prices that has not been seen in decades. The increase of the prime rate by a quarter of a percent is not much more than a symbolic act. The impact is minimal: Recently, only $14.3 billion in discount credits were due. Nevertheless, the markets reacted timidly. Chairman of the Fed Bernanke knows he has to proceed extremely cautiously now. Dubai and Greece have shown that the entire financial system is still susceptible to shocks. In the end, the Federal Reserve System will specifically keep an eye on unemployment rates.

Lately, the official rate has been just short of 10 percent. Unofficial sources show that the number is almost twice as high. Without a revival of the job market, Bernanke will not step on the economic brake in the election year of 2010. Fixing the job situation could take several months, though. Until then, he would rather accept a little bit more inflation.