Higher Interest Rates are a Good News/Bad News Story for Deposit Accounts

The last week has seen a sharp climb in bond market rates across the board, which could start to influence money market, savings account, and CD rates. While depositors in those accounts have been starved for higher rates, in this case there is a good news/bad news story behind the rise in rates.

In part, the rise in interest rates has been based on optimism about the recovering economy. Public companies are releasing their second-quarter results, and so far the earnings news has been largely positive. This is the good side of the story behind rising interest rates -- a strong economy raises demand for capital, so rates tend to rise. Also, depositors can rest easier with a more stable banking system.

The bad news side of the story is that rates have also risen because of new signs of inflation. Oil prices have been strong lately, bolstered by a weakening dollar. Overall inflation figures for June were released last week, and although prices have fallen over the past year, the figure for the individual month of June was the highest reading of the year. If inflation rises right along with interest rates, there is no benefit to depositors in terms of purchasing power.

Whichever cause of rising rates predominates, depositors would do well to keep their money short-term and flexible while those rates are rising, so account rates can adjust upward without too much delay.

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