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Savings Rates Remain Stable as FOMC Keeps Fed Funds Rate and Bond Purchases the Same
 

Savings Rates Remain Stable as FOMC Keeps Fed Funds Rate and Bond Purchases the Same

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Savings account rates remain stable this week, on the heels of last week's surprise statement by the Federal Open Market Committee (FOMC) to continue their purchasing of $85 billion a month in securities. The FOMC also decided to keep the federal funds rate at zero percent to ¼ percent which wasn't a surprise.

Bond Rates and Mortgage Rates are Sharply Higher


The Fed has been purchasing $45 billion a month in long term bonds and $40 billion a month in mortgage-backed securities (MBS). For the past several months, market forces drove long-term bond rates and mortgage rates sharply higher. 10 year bond yields almost doubled from 1.60 percent to around 3.00 percent.

30 year mortgage rates rose from a low of around 3.25 percent to a recent high of 4.75 percent. The very act of these rates moving sharply higher in such a short period of time most likely changed the Fed's plans on tapering. Back in May, the Fed Chairman, Ben Bernanke, hinted that the Fed might start slowing their purchases.

Long Term CD Rates Moved Higher


Savings Rates Remain Stable as FOMC Keeps Fed Funds Rate and Bond Purchases the SameLong term CD rates also increased the past several months by following long term bond yields higher. The increase in 5 year CD rates was the largest increase in the past several years but not as steep as the increase in long term bond yields. At the highest point recently, 10 year bond yields increased 1.30 basis points,

The increase in the highest 5 year CD rates the past few months was only 50 basis points. Before the increase, the best CD rates on 60 month certificates of deposit were around 1.50 percent. Right now, the highest 60 month CD rates are at 2.03 percent. On a percentage basis, 5 year rates increased 33 percent which isn't bad considering that rates have been moving lower for years.

Savings Rates and Money Market Rates Remain Stable


During this time of rising interest rates on bonds, mortgages, and certificates of deposit rates, other deposit accounts haven't budged at all. The best savings rates this week are still at 1.00 percent and the best money market rates are still just below 1.00 percent at 0.90 percent. Savings rates and money market account rates won't move higher until the Fed increases the fed funds rate.

The Fed isn't going to change the fed funds rate until the unemployment rate falls below 6.5 percent, which is the point in which the Fed has stated they plan to increase the fed funds rate. The current unemployment rate stands at 7.3 percent, so it will probably be at least another 7 to 8 months before the rate falls to 6.5 percent.

Where to Invest Those Dollars Until Rates Move Higher


Many of our readers are unsure what do with maturing certificates of deposit. The best thing to do at this point is to either place your money in a variable rate account such as a savings account or money market account. Another option is to invest in short term certificates of deposit.  The reasons being that interest rates will be moving higher in the coming months and years so the last thing you want to do is lock into a low rate for a long period time. Investing in a variable rate account will give you the opportunity to earn more interest once rates finally do move higher.

Investing in a short term certificate of deposit will also give you the opportunity to roll a maturing CD account into a higher rate CD account when rates move higher.
Author: Brian McKay
September 23rd, 2013