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Ask the expert: Is the budget deal a disappointment for savings accounts?

August 03, 2011

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

Q: Now that Washington has reached a budget deal, should I be disappointed? After all, I kept reading that interest rates would rise if the debt ceiling was reached. I, for one, would like to see higher rates on savings accounts.

A: It's a fair question: Would higher interest rates have been a silver lining for savings accounts, if the U.S. government had defaulted on its debt? Unfortunately, the reason interest rates would have risen under those circumstances would have been because letting people use your money, which includes depositing money in savings accounts, would have been viewed as more risky if the government had defaulted. Generally, people who choose conservative vehicles like savings accounts do not want to put that money at risk--even for the sake of higher interest rates.

Besides, there is reason to question the conventional wisdom that interest rates would necessarily have risen. Interest rates on U.S. government bonds have been declining, and this continued even as the debt ceiling deadline approached. The decline in bond yields continued once a resolution was reached. This pattern suggests that bond investors were looking past the short-term crisis and considering the long-term economic impact of the budget situation. That situation does not bode well for higher interest rates.

Default or no default, the one inevitability seems to be lower spending. That's one reason the bond market's behavior through all this has been so consistent. Government spending cuts are a drag on the economy. With economic growth sputtering, this comes at a particularly sensitive time. It is low growth that is chiefly to blame for today's drastically low interest rates--both because it means low demand for capital, and because monetary stimulus is one of the few tools the government has left to help the economy.

Either way, it looks like there never was a potential win here for savings accounts.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to the "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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