Savings Rates and Money Market Rates Poised to Move Higher in 2014

We have seen wild swings in short term U.S. Treasury rates the past month while savings rates have remained stable. Treasury rates on bonds of 1 year or less rose during the government shutdown and with the looming possibility of the U.S. Government defaulting on its debt. After a deal was reached, rates on bonds declined to levels prior to the shutdown and have declined further on a weak employment report.

Yesterday's employment numbers for the month of September, released more than two week late because of the shutdown, showed 148,000 jobs were created. Job growth for the month was less than what analysts expected. This sent bond rates down further because the Federal Reserve is more likely to keep their stimulus measures going for now.

Best Savings Rates/ Money Market Rates October 2013

Banks and credit unions are increasing the rates they are paying on savings accounts but the best savings rates available in our database are still at 1.00 percent. The same trend is happening for rates on money market accounts in that rates are increasing but the best rates are still at 0.90 percent.

The best savings rate available right now is from The Palladian PrivateBank at 1.00 percent. On our rate tables, we also have three banks offering savings account rates at 0.90 percent. CIT Bank, Barclays Bank, and GE Capital Retail Bank are all offering rates at 0.90 percent.

The best money market rate in our database at 0.90 percent is from the Sallie Mae Bank, the banking division of the student loan company Sallie Mae. We also have EverBank offering money market rates at 0.86 percent and Mutual Omaha Bank offering rates at 0.85 percent.

Slowly Inching Towards a Higher Federal Funds Rate

Deposit rates are tied to the federal funds rate which has been in a range of zero percent to one quarter percent since December 2008. This policy has sent deposit rates down to the lowest levels in generations and has kept a lid on rates rising though that is about to change.

The Federal Reserve has said the fed funds rate will stay at current levels until the nation's unemployment rate falls below 6.5 percent. While the September employment report was lackluster, the unemployment rate fell to 7.2 percent from 7.3 percent. For the past year or so, the rate has been falling on average about 0.1 percent a month.

If that trend continues, the unemployment rate could be at 6.5 percent in the April 2014 report. The April report will be released the first Friday of May. That is unless the government has been shut down again.

When Will Deposit Rates Increase and How Fast Will Rates Move Higher?

The Fed is scheduled to meet on April 29 and April 30, 2014. If the Fed decides to increase the fed funds rate at that point, savings rates, money market rates, and CD rates could start moving higher in May 2014. The first increase and subsequent increases in the fed funds rate will probably be in 50 basis point increments.

After the April meeting, the Fed will meet again 5 more times in 2014. The meetings are scheduled in the months of June, July, September, October, and December. If the unemployment rate continues to fall during 2014 and the economy picks up steam, the Fed may increase the federal funds rate after each meeting.

If that scenario plays out, we could see a federal funds rate of 3.00 percent which historically speaking isn't high and a 3.00 percent rate will be a neutral rate, neither increasing growth nor constricting economic growth. A 3.00 percent fed funds rate will mean savings rates and deposit rates around 3.50 to 4.00 percent and 1 year CD rates near 4.00 percent.

Stay Liquid in Savings Accounts and Money Market Accounts

Since interest rates are moving higher over the next year, one thing we’d recommend is to not lock in a low rate in a long term certificate of deposit. A better bet is to stay liquid in savings accounts or money market accounts.

Another option is to invest in shorter term certificates of deposit. Right now on our 6 month certificate of deposit rate table we have one bank, Zions Direct, offering 6 month rates at 1.00 percent.

Author: Brian McKay
October 23rd, 2013