Personal Finance Blog By MoneyRates - July 2010

Just as some positive momentum had been developing in the stock market, prices took a major tumble on Friday. This sudden reversal is typical of the twists the economic narrative has been taking lately, as the recovery seems in danger of petering out.

The drama extends to the outlook for bank rates, whose fate seems to lie in the economic balance. Savings account rates, money market rates, and CD rates all represent how much money a bank is willing to pay to attract deposits. Without a strong economy -- and with it the prospect for profitable investment and lending opportunities -- banks are less inclined offer higher rates to attract deposits.

Federal Reserve policies also have a hand in keeping interest rates low, and these too are likely to remain unchanged until the economy shows signs of sustained improvement.

In Friday's case, it was a combination of micro- and macroeconomic factors which tripped up the market. The micro factor was an earnings miss by Google -- meaning that the stock's earnings came in short of Wall Street expectations. The stock market had been rallying on a spate of positive earnings reports, which can represent a brick-by-brick building of economic strength. An earnings miss by as significant a stock as Google undermined the progress that had been made earlier in the week.

The macroeconomic setback last Friday was a disappointing report on consumer sentiment. Consumer sentiment is a tricky, and perhaps overrated, indicator. No meaningful recovery can get underway without consumers, but then again, consumers are often wrong about the strength of the economy. Employment remains the number one indicator to watch -- if that starts to build, both individual stock earnings and consumer sentiment will follow soon enough.

Are you impatient for higher savings account rates? Wondering if money market rates will ever move higher rather than lower? Agonizing about rolling over a CD at current CD rates?

Simply waiting for bank rates to move can be a frustrating exercise. It can help if you know to look for some early clues to higher rates.

On Monday, this blog explained that bank depositors have an indirect stake in the second quarter corporate earnings reports which started being released this week. To understand how that might actually play out, think of it as a chain reaction, in three steps.

1. The economy shows signs of hope. Bank rates can rise for two reasons -- because of economic improvement, or because of the threat of inflation. If inflation carries bank rates higher, it won't really do depositors any good, so the best hope lies in economic improvement. Individual earnings reports only give micro glimpses of economic conditions, but if enough positive results accumulate, it paints an optimistic picture. Also, certain stocks are considered bellwethers -- for example, Intel's positive earnings were considered a sign that business investment is picking up.
2. Investors react with optimism. This means stocks rise, while bonds fall. When bond prices fall, yields on bonds rise. 10-year bond yields have moved higher over the past week, but are climbing back from extremely low levels. They have a long way to go yet.
3. Bank rates respond to the changing interest rate environment. Higher bond yields means a generally higher interest rate environment, and eventually banks will have to respond to that. However, they won't respond all at once, so shopping on MoneyRates.com can keep you ahead of the curve when it comes to capturing the first bank rates to move higher.

Sure, death is scary. But even more frightening to most Baby Boomers is the prospect of running out of money.

Roughly six in 10 people said they feared outliving their income more than dying, according to a new survey by Allianz Life Insurance Co. of North America, which polled 3,200 people in May ranging in age from 44 to 75.

With the economy still stuck in low gear after the worst recession in 30 years, volatility in the stock market scaring away investors and bank rates at barely perceptible levels, perhaps the fear is not all that surprising.

Another factor that explains the dread is fear of the unknown. Almost a third of Boomers, 31 percent, said they weren't sure what their expenses might be in retirement, and 36 percent said they had no idea if their income would last.

"These results are troubling not only because people are fearful about retirement income, but also because of how little they know about how much money they'll need," Allianz Life President and CEO Gary Bhojwani said in a press statement announcing the survey results.

Baby Boomers Fail to Estimate Required Savings Rates

Survey respondents projected they'd need a median income of $59,000 per year, but they far underestimated how much they'd need to save to create that household income.

The study also asked people which they'd be more likely to guess correctly: how much money they'd have or need in retirement or how many gum balls are in a jar at the local county fair. Only a slim majority, 53 percent, felt certain about their ability to gauge retirement needs -- not many more than those who were more confident of their gum ball estimating skills.

Now that's scary.

If you have a credit card, you know that the past few years have seen a bevy of regulatory reforms, relating to everything from how card issuers handle credit card rate increases to caps on fees for late payments and over-limit charges.

At the end of 2008, the Federal Reserve directed credit card companies to include certain pieces of information on their cardholder statements to make payments and credit card rates more transparent to consumers. This rule became mandatory for credit card companies on July 1, 2010. As one major change, card issuers now must make clear how much interest you'll accrue and how long you'll take to pay off a balance by only paying the minimum payment each month.

FiveCentNickel.com has come up with a useful infographic--based on a sample statement from the Federal Reserve--showing what the new sections are and what they mean. Mousing over the numbers will provide more details about that section of the new statement.

You may be a conservative depositor who doesn't have much to do with the ups and downs of the stock market. Or, you may consider your bank deposits totally separate from your high risk/high return stock investments. Either way, you probably don't make an immediate connection between what's going on in the stock market and what you expect from bank rates. Still, as corporate earnings are announced in the days ahead, keep in mind that bank depositors do have an indirect stake in these results.

No, savings account rates, money market rates, and CD rates won't get an immediate jump-start if the stock market rallies on positive corporate earnings announcements. Still, good news from the corporate sector might be the best hope right now to send bank rates higher in the second half of this year. This is based on the premise that an improving economy would boost interest rates.

You see, there are three elements to the domestic economy -- government spending, consumer spending, and business spending. The government has used about as much ammunition for fiscal stimulus as it can find, and now a ballooning deficit will start to rein in its spending. Consumers are plagued by lingering high debt levels and a weak job market. In contrast, corporate profits have recovered powerfully over the past year.

Ultimately, corporations won't invest much unless they see the consumer coming around. However, strong profits at least create the potential for a rise in business investment. If some of that investment results in hiring, it may just be the spark to get consumers -- and ultimately bank rates -- up off the mat.