When Will Savings Rates and Money Market Rates Move Higher?
For several months now, long term bond yields and mortgage rates moved higher while savings rates haven't budged at all. 10 year bond yields increased from a low point of 1.62 percent in early May to the current level of just under 3.00 percent. The steep increase of 10 year yields practically doubling caused the quickest spike in 30 year mortgage rates ever.
During this time, the best savings rates available haven't increased at all and remain at 1.00 percent. One factor that might change this is a change in monetary policy by the Federal Open Market Committee (FOMC). The Committee is scheduled to meet next week and set the course for future policy.
Will The FOMC Increase the Federal Funds Rate?
The federal funds rate, which is at a current targeted range of zero percent to ¼ percent, isn't expected to be increased by the Committee. Another policy that the FOMC embarked on years ago, called quantitative easing (QE), was designed to force long term bond rates and mortgage rates lower.
The FOMC is currently on their third round of easing known as QE3 which involves the purchase of $40 billion a month in mortgage-backed securities and $40 billion a month in long term bond yields. Many analysts believe the FOMC will announce a paring back of their purchases. Even the hint of this happening is the cause of long term bond yields and mortgage rates have spiked higher.
Deposit Interest Rates Driven to Record Lows
While the FOMC has been very successful at forcing mortgage rates and bond yields lower, their policies have also driven deposit rates to record lows. About a year ago, the FOMC acknowledged this but also shrugged it off by saying that low interest rates is helping asset prices increase on business and home values.
Tell that to retirees who don't own a business, have downsized to a smaller home and are trying to live off interest income on deposit accounts. The current national average savings account rate/money market account rate this week is at 0.45 percent ($10,000 balance) with the highest savings rates at 1.00 percent, just more than double the average.
When Will Savings Rates Move Higher?
Even if the FOMC announces a tapering of their purchases, savings rates and money market rates won't move much higher. Long term CD rates that have already increased will probably move slightly higher but short term CD rates won't budge at all. Rates on these types of accounts won't increase until the federal funds rate is increased.
The Committee has stated they will increase the federal funds rate when the nation's unemployment rate falls below 6.5 percent. I wouldn't expect a 6.5 percent unemployment rate until early spring 2014. When the federal funds rate is increased, banks will follow with increasing savings/money market rates and short term CD rates will probably happen sometime in late spring of 2014.
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