Personal Finance Blog By MoneyRates - January 2010
January 27, 2010
The Federal Reserve is said to be considering how to unwind the various stimulative measures it has taken over the past year and a half. Those stimulative measures include lowering the short-term rates at which the Fed makes money available to banks, and actively buying bonds to lower longer-term interest rates. The Fed's actions have been influential in driving bank rates to record lows, so any unwinding of those efforts should spark some recovery in savings account rates, money market rates, and CD rates.
The exit strategy involves a delicate balance. The Fed cannot maintain these stimulative measures indefinitely, and yet, it is questionable whether the economy is ready to stand on its own two feet without their support. So, while raising interest rates seems on the surface to be a decision that is in the hands of the Fed, the truth is that larger economic forces more or less dictate the Fed's actions.
Is the economy now strong enough for the Fed to start backing away? The financial markets don't think so. Bond yields have been sliding down all month, and the stock market has fallen sharply over the past week or so -- both signs of concern about economic weakness.
In short, the Fed's exit strategy for its measures to drive down interest rates will have a great deal to do with when bank rates finally start to recover. However, economic strength will dictate when that exit strategy is rolled out, and right now, the economy is doing little that would encourage the Fed to start backing away.
January 26, 2010
Surely one of the lessons that all bank customers should learn from the bank meltdown of the past two years is that in the global economy, links between people--and people's money--are complex and multiplicitous.
The connection between mortgage holders and savers, for example, is a storied one. Banks take deposits from savers and then lend out those deposits in the form of mortgages; that has been the model for a good century now.
This week it was reported that existing home sales declined by 17 percent in December, the largest monthly drop in 40 years.
Anyone who holds a savings account must be at least a little bit concerned about the possibility that the housing market may not pick up anytime soon. Why? Because banks need home prices to stay in the range that they are--otherwise, there are millions of people who may walk away from their mortgages.
Of course this has already been happening, as heavy bank loan losses show, but so far it has not happened on the scale that it probably could if prices drop, say, another 10 percent. Certain areas of the country and certain neighborhoods are definitely holding strong as far as home prices; however, anyone who bought a home circa 2005-2007 has thought or is currently thinking about ditching the mortgage and going back to renting.
Banks suffer if that mentality becomes fully mainstream. Savings accounts are stronger when banks are strong. When looking for savings accounts online, be sure to evaluate the strength of the banks you're considering.
January 25, 2010
When Republican Scott Brown won the special election to fill the Senate seat long held by Edward Kennedy, the initial focus was on how the shifting balance of Congressional power could slow down, dilute, or even doom health care reform. With banking reform another hot topic in Washington, it is also worth considering what this change would mean to President Obama's recent proposals on that subject.
The President has proposed three changes concerning banks: 1) to levy a special tax on the largest banks to recoup some of the money spent on the banking bailout; 2) to restrict banks from endangering deposits with proprietary trading; 3) to limit the size any one bank could achieve.
From a depositor's view point, the first of these proposals could suppress bank rates as banks seek to pass the cost of the tax along to depositors. The second proposal could be good for depositors by making their accounts safer. Bank lobbyists would argue that proprietary trading leads to profits which can encourage banks to offer higher bank rates, but this has proven to be a bad deal for depositors in the past. When banks take excessive risk, if they win the banks keep the lion share of the profits. When they lose, depositors assets are in jeopardy. Finally, the third proposal, to limit the size of banks, doesn't really seem workable, but it would probably be more of a neutral issue for depositors anyway.
With it now more difficult for the Democrats to unilaterally push anything through the Senate, one impact of Brown's election is that these banking proposals will stand less chance of passage. On the other hand, it could push Democrats in an even more populist direction, which usually backfires economically. Stay tuned to see how this plays out!
January 20, 2010
Bank rates have been in a squeeze lately. It doesn't matter whether you look at savings account rates, money market rates, or CD rates, the level of bank rates generally has been low and showing little sign of movement in recent months. Meanwhile, inflation has been on the rise -- and that's where the squeeze comes from.
For a while, low-to-negative inflation rates were the one silver lining about bank rates. Looked at on the basis of return over inflation, even a 1% or 2% bank rate isn't bad if prices are going down. In recent months, though, with inflation rising and bank rates standing pat, that return over inflation has been eaten away.
Fortunately, today's announcement that the Producer Price Index rose only 0.2% in December, along with last Friday's announcement that the Consumer Price Index rose only 0.1% for the same period, may represent some easing of inflation pressures. The two previous readings of the Producer Price Index had been 0.3% and 1.8%. As for the Consumer Price Index, December's figure was the smallest increase since July of 2009.
Producer prices tend to be more erratic from month to month, while retailers try to keep consumer prices more steady for competitive reasons. However, if producer prices make a sustained upward move, consumer prices will be forced to follow to some degree, or else retailers will lose their profit margins.
What depositors really want is to see bank rates rise. While they are waiting though, it is equally important that inflation doesn't completely overwhelm those rates. Thus, the moderating of producer and consumer prices in December is a good sign. Still, inflation bears as close an eye as bank rates themselves.
January 19, 2010
The sixth annual Wealth and Values survey from PNC bank came out recently, and it is worth a read for anyone who's interested in the savings patterns and attitudes happening today.
One interesting, potentially overlooked tidbit from the survey came from this statement: "The events surrounding the recession have prompted me to have discussions with my children about finances and money."
47 percent of respondents agreed with that statement, 23 percent disagreed, and 30 percent had no opinion either way.
The events of the last two years--most notably the near-total collapse of the U.S. banking system--should absolutely give rise to inter-generational conversations about money and finances.
For example, with CD rates rather low at the moment, younger savers may be tempted to think that the stock market is the answer--that the stock market is the ultimate high interest savings account.
It is not. Therefore, we must teach kids about stock market crashes.
Other young people coming of age in the next few years may view the bank that holds their savings account as indestructible, invincible, an edifice that could never suddenly come crumbling down.
Banks are not that, either. Therefore, we must teach kids about FDIC insurance, why it's important and what its limits are.
In the process of having these conversations, it's very likely that both parties will learn from each other-- a great outcome for everyone.