If the Sequester Hits, Savings Account Rates Will Fall Further

In two weeks, the sequestration of automatic spending cuts will hit us if Democrats and Republicans can't come up with a deal. The likely outcome will be another delay, kicking the can down the road, for several more months. The Democrats proposed a plan to put off dramatic cuts to the Defense Department and social programs until next January which the Republicans rejected.

Frankly the sequestration is probably the best thing that will lower the deficit in the long run but the short term pain would throw the economy into a recession and cause unemployment to rise again. If this scenario plays out, the Federal Reserve will have to keep the fed funds rate near zero percent longer than the projected time frame of the end of 2015. Savings account rates and money market account rates would also fall from current levels.

The best savings rates are in our rate database and are at 1.00 percent and the best money market account rates are at 1.01 percent APY. If a deal on the sequestration is reached, interest rates won't move higher right away but would move higher before the end of 2015. The key to higher savings rates and money market rates is a lower unemployment rate.

Once the unemployment rate falls below 6.5 percen,t the Federal Reserve will be less accommodating by increasing the fed funds rate and shortly thereafter banks will follow with higher deposit rates. The highest bank savings rate in our database is from Barclays Bank and CIT Bank at 1.00 percent. The highest money market rates in our database are from Colorado Federal Savings Bank at 1.04 percent with an APY of 1.05 percent.

The sequestration is only one third of the three parts of the fiscal cliff. A last minute deal was reach on the first part of the cliff, the tax hikes that were going to hit everyone on January 1, 2013. The second part is the sequestration, and the third part on the horizon is funding the government for the coming year.

Both political parties have to stop the shenanigans and fix this manufactured crisis before they sink the economy. We have already seen 4th quarter GDP contract 0.1 percent because of worries about the fiscal cliff. We have suffered long enough with the lowest interest rates in a generation.

You can listen to Boehner talk about the Sequester in the video below:

Author: Monica Harris
February 16th, 2013