Future Direction of Savings Rates Depends on Debt Ceiling and Budget Talks

For many years now we have all been patiently waiting for the cycle of low interest rates to end. Savings rates, money market rates, and all deposit rates have been at or near record lows since the Great Recession of 2008. The Federal Reserve lowered their key interest rate, the federal funds rate all the way down to a range of zero percent to one quarter percent.

Average Savings Rates and Best Savings Rates

The Federal Reserve's action sent the best savings rates and money market rates below 1.00 percent. Average interest rates are even lower. The current average rate on accounts of at least $10k is at 0.45 percent. The best interest rates this week for account balances of at least $10k are from The Palladian PrivateBank at 1.00 percent.

Jumbo Savings Rates the Same as Regular Savings Rates

Average savings/money market rates for account balances of at least $25,000 are slightly higher at 0.58 percent. Account balances of at least $50,000 have an average rate of 0.64 percent. Notice how the higher account balances only earn a slightly higher rate? Gone are the days of higher jumbo rates for higher account balances, at least for now.

Most banks and credit unions are not really offering higher rates on jumbo accounts. Before the financial crisis you could easily find financial institutions offering jumbo rates anywhere from .50 to 1.00 percent higher than regular account rates. We will probably see higher jumbo rates in the future when all rates move higher.

Budget and Debt Ceiling Talks Will Drive the Direction of Interest Rates

A lot depends on how the budget and debt ceiling talks play out in Washington. The Government shutdown won't have a direct impact on interest rates but a prolonged shutdown will. If the shutdown lasts for months, it will negatively impact economic growth which would keep a lid on any interest rate increases.

The debt ceiling is an entirely different animal and can't directly have an impact on interest rates. If the debt ceiling is breached and the United States defaults on its debt, initially U.S. bond rates will move lower. This will also keep savings rates and all deposit rates at current levels or will continue to drift slightly lower.

Default on Debt Unlikely According to Moody's CEO

Moody's CEO Raymond McDaniel said in an interview with CNBC that a default was highly unlikely. I hope he's right because a default would send equity prices tumbling and bond yields lower as well. Bond rates would initially move lower because everyone assumes in the long run the U.S. will pay its debt off.

Rates would initially move lower because there would be a classic flight to quality in the markets as everyone would dump stocks and flee to the safety of U.S. Treasuries. This is ironic because if there were a default, then everyone would buy the very same bonds from the country that defaulted.

You can read and view the video of CNBC's interview of Moody's CEO here: Moody's CEO: US default 'extremely unlikely.'
Author: Brian McKay
October 7th, 2013
Posted in: Savings Accounts