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2010 Outlook: Top Six Factors That Will Affect Money Market Rates

January 14, 2010

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

You follow the financial news, and there is certainly no shortage of it. The problem is, news reports often seem to be contradictory, and in any case, how can you tell which trends and events affect your money? This article will help people with money market accounts focus on six potential developments that will be important to their deposits in this new year.

Six Factors Affecting Money Market Account Interest Rates

After an extraordinarily low year for bank rates in 2009, most depositors will be happy to see the calendar turn the page. Will 2010 be any better? These six factors may tell the tale.

  1. Lending activity. Depositors and borrowers are somewhat dependent upon one another. Borrowers depend on depositors to supply banks with the capital needed to make loans. Depositors need borrowers to make lending a profitable activity for banks, so that banks will pay more--that is, offer higher rates on money market accounts and other deposits--to attract that capital. Lending was one of the primary victims of the financial crisis. Banks, borrowers, and depositors could now all benefit from its recovery.
  2. Housing prices. A steady increase in housing prices (but no new boom, thank you) would both encourage mortgage lending activity and slow down the flow of foreclosures. On a fundamental level, a housing market recovery should make the banking system more stable, and eventually, improved profitability will encourage higher bank rates. So far, home prices have seen a little bounce off their low point, but this improvement needs to be sustained well into 2010 to create an environment conducive to higher money market account rates.
  3. Economic growth. Consistent economic growth is also necessary to improve the lending environment. So far, US gross domestic product (GDP) has posted one positive quarter. Continued GDP growth in 2010 will signal that the recovery is taking hold.
  4. Unemployment. Employment is always a key foundation of economic strength, and improvement in employment is especially important with the unemployment rate still in double-digits. Employment growth will also help ease foreclosures. So far, despite signs of some growth in the economy, there has been barely any improvement in the unemployment rate. This is not unusual--historically, it has taken about six months on average after the end of a recession before unemployment peaks and starts to improve. Based on this, look for improvements in unemployment in the first half of 2010 if the recovery is really taking hold.
  5. Commodity and producer prices. Rising commodity and producer prices could choke off a fragile economic recovery and fan the flames of inflation. Higher money market account rates are not much good to you if inflation is rising even faster, so hope for commodities and producer prices to stabilize in 2010.
  6. Inflation. Commodities and producer prices are just part of the mix that determines consumer prices. Inflation turned positive again in late 2009, which is nothing out of the ordinary. Whether inflation remains moderate, and how money market rates react, will determine whether you gain or lose purchasing power in 2010.

As you consider what actions you should take while waiting for all this to unfold, start with what you can control. Work on getting your personal savings rate up so that, no matter what happens with bank rates in 2010, you'll be in position to take greater advantage of the situation.

 

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