When Will Money Market Account Rates Rise? Three Scenarios

For better or worse, waiting patiently is not generally in the American character. It's bad enough waiting for something that's scheduled to happen on an assigned date, but waiting for something that has no set timetable is especially agonizing. That's the way it is right now with waiting for money market rates to rise.

With bank rates at extreme lows, it is probably safe to discuss the issue in terms of when, not if, money market rates will rise. Still, the timing is critically important to depositors. Individuals have to decide whether to stick with money market accounts or seek riskier alternatives for higher returns, and a key to that decision is forecasting how long it will take for money market account rates to rise. In this case, time literally is money.

To help you think through the possibilities, here are three scenarios for what could happen with bank rates in 2010.

• Scenario #1: Bank rates rise almost immediately. Some economic fundamentals in support of higher rates are already in place. The economy grew in the third quarter of 2009, and there is a reasonable expectation that Gross Domestic Product will post a positive fourth quarter as well. Inflation has returned after a period of deflation. Bank rates themselves are so low as to be considered an historical aberration. Bond market rates already moved higher in December; can money market rates be far behind?
• Scenario #2: Rates rise in the second half of 2010. Yes, the economy finally posted a positive quarter in the third quarter of 2009, but at an anemic growth rate that has twice been revised downward. Retailers were so nervous about growth in the fourth quarter that discounting was rampant throughout the holiday season. This will dampen the dollar value of sales and may stall the revival of inflation. Meanwhile, the government is in no hurry to discontinue its low interest rate policies--the feeling is that the economy does not have enough momentum for the government to risk taking its foot off the accelerator. In this environment, would it be any wonder if bank executives took a wait-and-see approach before raising rates on money market accounts and other deposits? Unlike bonds, deposit accounts are not freely traded instruments, so banks can wait until there is a convincing economic growth trend before raising rates significantly.
• Scenario #3: Rates make little progress in 2010. What just about everybody--from President Obama to the guy running the corner store--fears is a relapse. Employment remains a problem, and foreclosures continue to plague the housing market. In short, the foundation for economic growth and financial system stability is still shaky. If there is a relapse into an extended period of recession, money market rates may not have a chance to go anywhere in 2010. The situation is so fragile that if the economy takes a significant step backward in early 2010, money market account depositors might already have to start thinking about 2011.

As you can see, forecasting what will happen with money market account rates is complicated by the fact that there are three very plausible scenarios for how the current environment could play out. Overall, though, it seems the odds favor money market rates ending 2010 higher than they began the year.

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