Money Market Rates Decline and Savings Account Rates Remain Stable
As sequestration nears, the best money market rates fall 4 basis points and the best savings rates remain stable at 1.00 percent. In unusually direct remarks on fiscal policy, the Federal Reserve Chairman, Ben Bernanke, warned Congress yesterday about sequestration and the front-loaded spending cuts derailing the recovery.
Bernanke said "The Congress and the administration should consider replacing the sharp, front loaded spending cuts required by the sequestration, with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run." Bernanke is right, failure to replace these cuts with sensible long term cuts will cause the economy to fall back into a recession.
Another recession would send savings rates and money market rates even lower from current levels for several more years. Right now, the highest savings account rates and money market rates are at 1.00 percent. Average rates are even lower - the current national average savings rates is at 0.07 percent and the average money market rate is slightly higher at 0.12 percent.
At this point, rates are expected to stay low until the unemployment rate falls below 6.5 percent. You might be thinking, "How is the unemployment rate tied to bank rates?" There is a direct correlation because deposit rates are tied to the federal funds rate, so when the federal funds rate moves higher, deposit rates move higher.
The fed's current policy is to keep the fed funds rate at zero percent until the unemployment rate falls below 6.5 percent. The fed also believes they will have to do this until the end of 2015, the point at which they also believe the unemployment rate falls below 6.5 percent. If the economy falls back into a recession, rates will stay lower to at least the end of 2015.
It is unfortunate that Republicans and Democrats can't come to an agreement on the spending cuts. The economy is still very fragile and more government job cuts along with lower unemployment benefits will cause another recession. If this happens, it might be time to lock into current rates by investing in a certificate of deposit.
The best CD rates on 1 year certificates of deposit are also at 1.00 percent and the best CD rates on 3 year certificates of deposit are at 1.34 percent, but at least you lock in a rate instead of watching savings rates move even lower.
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