Personal Finance Blog By MoneyRates - July 2009

Whenever deposit accounts are discussed -- including savings accounts and certificates of deposit -- much of the attention naturally falls on interest rates. There's nothing wrong with all that. Interest rates are, well, interesting.... Still, you have to look beyond them when choosing bank products. They are a great starting point, but then you have to look at the other terms and conditions to make sure they don't overwhelm any interest rate differential.

Fees are one example. Maintenance fees, transaction fees, or early withdrawal fees can exceed the amount of interest you earn under certain circumstances, so it is important to choose an account that will let you minimize or even eliminate these charges.

Then there are other special features. Discover Bank, for example, has a 12-month CD that will allow you to withdraw without penalty if you lose your job. That's a recession-friendly feature. Most people think of Discover in connection with their widely-used credit card, but they are also one of the country's 100 largest banks, offering savings accounts and CDs.

The point here is that interest rates are important, but don't let your choice of deposit products be a one-dimensional decision.

Chairman of the Federal Reserve Ben Bernanke is speaking before Congress as we speak, and he's covering a lot of ground. Major points of Bernanke's speech include: unemployment is likely to remain high throughout 2010, inflation is likely to remain low in the next few years, and Congress should leave the Fed alone.

Indeed, Bernanke directly confronted the increasing encroachment of Congress into the activities of the Federal Reserve, especially with regard to the Fed's massive influence on interest rates. Historically, the Fed has been an independent agency, but the recent recession has tested Congress' ability to let the Fed alone.

Bernanke's passive-aggressive warning today follows a letter from 150 economists and professors demanding that Congress keep politics out of the Fed. Over the next couple years, as the economy hopefully recovers, the Fed may raise interest rates in order to prevent or control inflation.

But what if Congresspeople, liking the effect that low interest rates are having on the business communities of their districts, decide that now is not the time to raise interest rates?

That scenario is the one worried about by Bernanke and the 150 academics. For depositors concerned about CD interest rates, money market interest rates, and saving account rates, making sure that the Fed has the power to raise interest rates no matter what Congress says is far from academic.

Without the ability to freely raise interest rates regardless of politics, the Fed could lose control of inflation, destroying the real value of saved funds held in 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.

Just when many were ready to pronounce inflation officially dead, June's Consumer Price Index report showed a surprisingly strong 0.7% increase for the month. This is worth noting for anyone watching interest rates on certificates of deposit, money markets, or savings accounts.

The inflationary blip in June marked a bounce back in prices by the energy and transportation sectors, the same sectors that have shown the biggest price declines over past year. Does that mean the trend is turning? Those in the deflation camp would correctly point out that single-month numbers are notoriously volatile and therefore not necessarily indicative of anything. Indeed, the year-over-year deflation reading actually steepened in June, because this June's number replaced a similarly strong increase in June of last year.

Still, it's also worth noting that Producer Prices posted an even heftier 1.8% increase this past June, so there may be some fundamental cost pressures coming into play. Certainly the bond market is taking the latest numbers seriously, with bond yields rising since last week.

For bank depositors, rates don't react quite as quickly as the freely-traded bond market. So, this might not be a good time to lock into CD rates that have not yet adjusted upward to the latest change in market direction. Meanwhile, it's a good time to keep a sharp eye on money market and savings account rates, because these will readjust at a different pace from one bank to the next.

House prices have declined steeply over the past couple years, no doubt, leaving 21 percent of homeowners with no or negative equity, according to Zillow.com. But some people still have plenty of equity: seniors.

Of late, many seniors have been using that equity to increase quality of life, pay for medical costs, or satisfy some other financial desire. Reverse mortgages have gone mainstream. Since 1961, according to AARP, approximately 350,000 reverse mortgages have been financed. Two thirds of that total has occurred in the last four years.

The total of HECM reverse mortgages--the main government-backed form of reverse mortgage--went from 157 in 1991 to 55,659 in 2006.

The reverse mortgage has lost its stigma as a decision made by seniors who really need the money. Now, a reverse mortgage is viewed as a viable option, especially in light of recent stock market volatility.

More mortgage brokers are getting into the reverse mortgage business as well, due to this increased demand. Reverse mortgage quotes are much easier to find and more reliable than in days past.

As word of mouth travels, it's to be expected that more seniors will take a hard look at the reverse mortgage option.