Bank Rates Likely to Get Better

Rates on bank deposits are set to go higher if the recent statements of leading economists and the Federal Reserve Chairman are to be believed. The economy is still mired in recession, but the pace of contraction has decreased. Any hints of economic growth, when combined with the enormous amount of money flooded into the monetary system by the Fed, could force the Fed to increase short-term interest rates to combat their new enemy - inflation. Even if the Fed does not increase rates this year or if GDP stays negative through the third quarter and fourth quarter of 2009, long-term interest rates may increase. This is because long-term interest rates are market-driven and the market is beginning to factor in those expectations of inflation. Treasury yields have increased. Mortgage rates have bumped up this week. What's next?

Savers who invest in bank money market accounts, savings accounts, and CDs have an advantage over investors who keep their funds in money funds, bond funds, and many other fixed-income securities. Banks are nimble and can easily increase their rates based on market action. Portfolio managers, on the other hand, are stuck with the securities in their portfolio and it can take a long time to increase the yields on their fixed-income or money funds. Why? Fund managers have to play a waiting game and sit tight until the underlying securities in their funds mature and they can then reinvest at higher coupon rates. In a period of increasing interest rates, a saver will reap the benefits (higher rates) much quicker with their bank deposits than they will with their money market mutual funds or bond funds. Keep tabs on the latest rates changes by checking the rate tables at Moneyrates.com.

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