Money market accounts represent an attractive compromise between flexibility and the ability to earn interest. Money market rates are higher than you are likely to get on a checking account, yet money market accounts typically allow more access to your money than a savings account. Assuming both components are important to you, it is important to regularly monitor the interest rate on your account.

People put a great deal of emphasis on rates when choosing an account, but this focus is no less important once you have the account. After all, money market rates are subject to change at any time, and rates change differently from one bank to the next. In other words, both the absolute level of money market interest and the level relative to other banks' offers will change over time, which is why it is good to keep an eye on the market for these accounts.

Influences on Money Market Rates

What are some of the factors that affect money market interest rates? First of all, there are general changes in the interest rate market. Treasury bonds, and especially short-to-intermediate bonds, are a good indicator of how market rates are changing. Money market interest rates won't immediately follow day-to-day changes in the bond market, but over time they will be pulled in the same direction as the trend in bond yields.

While there are market-wide trends in interest rates, there are also bank-to-bank differences that affect money market rates. For one thing, some banks may be in a stronger financial condition and thus able to offer stronger rates, while weaker banks might be forced to guard their profit margins by reining in the rates they offer. In addition, some banks may be using rates more aggressively as a marketing tool than others, and thus using higher rates to attract attention.

Recent Conditions

Recent conditions have only underscored the importance of monitoring money market account rates. Interest rates have been volatile. After trending downward for the first half of July, bond yields then snapped back upward abruptly. Since different banks will react to the trend in interest rates at different times, this volatility creates a highly variable set of conditions.

Also, even though the banking industry as a whole has stabilized, conditions for individual banks can still change quickly, and this further magnifies the difference in rates from one bank to the next.

Monitoring Money Market Rates

What are some things you can look at to monitor all this? Here are a few key benchmarks.

• Bond market indicators. Bond market and money market yields won't correlate exactly, but over time they should move in the same general direction. Looking at the direction of 1- to 3-year Treasuries should give you an indication of how you should expect money market rates to move in time.
• Average money market rates. Looking at the average rate of money market accounts, and how this rate changes over time, will let you see whether your account is reacting more or less to general market trends.
• Top money market accounts. See if your account is maintaining a competitive edge by watching the top money market offers. That doesn't mean you should jump every time you see a better offer, but you do want to make sure your bank is staying reasonably competitive.

The bottom line is that in order to maximize your money market rate of return, an eye on the market in general and your institution / account in particular help you keep your money where it will earn its keep.