Market Recipe Bad for Bank Rates — For Now

The mix of factors now prevailing in the financial markets is almost the perfect recipe to challenge anyone depending on CD rates, savings account rates, or money market rates. In other words, it may be the perfect poison for bank rates. Fortunately, markets eventually tend to find antidotes to their own ills.

First the poison, then the antidote.

The poison consists of three ingredients:

• A U.S. dollar which has been steadily sinking. The weakness of the dollar can be seen immediately in the rising price of oil, but eventually it will show up in the prices of all imports, creating inflation pressure here in the U.S. Bank rates are really only as good as the premium they offer over inflation. When rising inflation squeezes that premium, depositors suffer.
• Signs of life in the U.S. economy. At least, the stock market seems to think the economy is on the right track. If the rising stock market is right, a strengthening economy would spell the end of the deflationary period, and another reason for the return of inflation.
• Government policies committed to keeping interest rates low. The government (like many experts) views the recovery as fragile, so they are going to do everything they can to keep interest rates at low, stimulative levels for as long as they can.

So much for the poison. The antidote? That also comes in three parts:

• A strengthening economy would increase demand for capital, which would make banks offer higher rates to attract depositors.
• Rising inflation would force the Federal Reserve to raise rates before inflation gets out of hand.
• Without waiting for those market forces to come around, you can mitigate the effects of the poison by shopping actively for the best bank rates. The spread between the best and average bank rates is huge.