Money Market Rates May Rise Once the Recession Ends, but It's No Sure Thing
October 04, 2009
Money Market Rates: What Will the Recession's End Mean for Yields?
Like most bank rates, money market rates have been extraordinarily low during this recession. With Ben Bernanke and many commentators now saying that the end of the recession is near, will that mean you can look for higher rates on money market accounts?
A look at interest rates and economic cycles historically provides some hope--but with an important caveat.
Money Market Rates and the Economic Cycle
There are no comprehensive data sets on money market accounts that go back for decades, but 3-month Treasury Bill yields can be used to get a long-term perspective on how money market rates behave following recessions. Although 3-month Treasury yields are not identical to money market rates, both are short-term interest rates and will tend to move in the same direction. Thus, looking at changes in 3-month Treasury yields following past recessions should give you a feel for how money market rates might behave in the same situation.
The US Federal Reserve has data available on 3-month Treasury yields going back to the mid-1930s. There have been 12 recessions since then, not counting the current one. This gives us several examples of what has happened in the past when recessions have ended.
Conventional wisdom is that interest rates should perk up when the economy starts to expand. The logic is that demand for capital pushes up the price of money (essentially, interest rates), and that interest rates also rise to keep up with climbing inflation.
In general, history backs up this logic. On average, during the first 6 months of the last 12 economic expansions, 3-month Treasury yields rose 0.65%.
If that does not sound like much, it's because there are numerous exceptions. Of those 12 expansions, 3-month Treasury yields rose six times, fell five times, and stayed the same once. A 6-5-1 record hardly reflects a dominant trend.
So what happened to the conventional wisdom about rising interest rates? There are several variables at work on interest rates besides the economic cycle. There have been major rising and falling interest rate trends that have superseded economic cycles, and these can overwhelm any cyclical impact. There have also been a variety of different inflation environments over the past 75 years. Finally, the economic recoveries in question were of varying strengths.
There is one interesting observation if you think interest rates can't possibly get any lower than they are now. Only once before, in 1938, has a recession ended with 3-month Treasury yields lower than they are today. Back then, they were at 0.05%, yet incredibly, over the first six months of the that expansion, yields actually fell another 2 basis points to 0.03%.
Finding a Money Market Account on Money-Rates.com
Since history offers no guarantee of higher money market rates in the months ahead, you should do everything you can to take matters into your own hands. If you shop for money market accounts on money-rates.com, you will find a significant spread between the highest rates and the average rate, and especially the highest rates and the lowest rates. The best hope that history can offer for higher money market rates is a conditional "probably," but you can do your best to maximize your return by making sure you get a rate on the higher end of the range of what's available.
Source:
Business Cycle Expansions and Contractions • National Bureau of Economic Research: http://www.nber.org/cycles/cyclesmain.html
