Personal Finance Blog By MoneyRates - August 2010

The wait for higher money market rates, CD rates and savings account rates is largely a matter of monitoring the economy's pulse. However, it will take more than a flicker of strength to move bank rates.

Yesterday, the stock market rallied strongly, gaining back some of its steep losses from last week. All in all, the stock market isn't too badly off--it's down about 10 percent from its high point for the year, but off only a couple percent so far in 2010.

Bond yields also pushed higher yesterday, but they've been much more beaten down than stocks. Ten-year Treasury yields began 2010 above 3.8 percent and peaked at around 4 percent in early April. Since then, though, it's been just about all down hill, with 10-year Treasury yields having to rally yesterday to get back above 2.6 percent.

The sustained slump in long bond yields since early April indicates that the markets believe interest rates will remain low for quite a while longer. Bank rates are unlikely to rise much until bond yields have been higher for a sustained period of time. As pulses go then, yesterday's flicker of optimism barely registered.

Average bank rates remain well below half of one percent, though the best CD rates are well over 1 percent, as are the best money market rates and interest rates on savings accounts. Again, getting them moving will take more than a flicker of optimism -- it will take a steady stream of evidence that convinces the financial community that the economy's pulse is gaining strength.

If you think unemployment is bad, consider the number of people who are underemployed.

By Gallup's reckoning almost one in five people -- 18.3 percent of Americans -- either don't have jobs or are working part-time and want full-time employment as of mid-August. The research outfit's numbers are based on on more than 15,000 phone interviews with adults in the workforce collected over a 30-day period. They tend to be a precursor of government reports by about two weeks.

The share of part-time workers who want full-time jobs fell slightly in mid-August to 9.2 percent from 9.5 percent at the end of July, but that drop was offset by an increase in the unemployment rate measured by Gallup, which rose to 9.1 percent.

Young people are facing the toughest job prospects. Among Americans ages 18 to 29, 27.6 percent were underemployed in mid-August -- including almost 12 percent who didn't have a job at all and almost 16 percent who were working part-time but wanted full-time jobs.

Who's more likely to be underemployed?

More women then men are underemployed, and people without any college education are having a tougher time finding jobs than those with higher education levels.

There is one bright spot: Forty-five percent of underemployed Americans said they were "hopeful" in mid-August -- the highest level so far in 2010, Gallup reports.

Meanwhile, those who have jobs aren't all that happy either. About a quarter are afraid of being laid off, and a quarter are worried about pay reductions, according to Gallup. No wonder consumer spending -- which accounts for 70 percent of the economy -- remains stalled.

The employment picture must brighten for interest rates on money market accounts, savings accounts and CDs to turn around. Now best CD rates are as dismal as underemployment and will remain so until the economy turns a corner.

Last week's Federal Reserve meeting ended with less than the usual fanfare in the financial press. It would appear editors are beginning to realize that "Fed Does Nothing -- Again" doesn't make for much of a headline.

With the Fed funds rate near zero for a year and a half now, the Fed has few places to go with monetary policy. The best it could muster last week was a decision to roll some proceeds from earlier purchases of mortgage-backed securities into the purchase of U.S. Treasury bonds.

The move to buy bonds is a technique to keep long-term interest rates low. The Fed can directly control very short-term interest rates (e.g., rates used for overnight lending to banks for liquidity purposes) but as a practical matter, longer-term rates that affect consumer loans are a function of bond market trading. When the Fed buys bonds on that market, it pushes the price of bonds up, and the yield, or effective interest rate, on those bonds down.

This is all well and good, but since the Fed is simply rolling over proceeds that were already in the bond market in one form or another, the Fed is simply keeping its foot on the accelerator, rather than providing some new boost to the economy. Plus, the stimulus of keeping interest rates low hasn't had much impact on an economy in which there seems minimal desire for borrowing or lending. Unfortunately, the Fed has little additional room to maneuver.

With interest rates likely to stay low, consumers need to take it on themselves to shop around for the best CD rates, money market rates, and offers on savings accounts. You can find rates that are several times the national averages, so why wait for a change in Fed policy?

The Federal Reserve announced yesterday that it would pour some of the proceeds from earlier investments in mortgage-backed securities into U.S. Treasury bonds. It's questionable whether this will help the flagging economic recovery, but it represents yet another policy decision that could cost depositors.

By purchasing bonds, the Fed aims to keep market interest rates low, and by extension hold down borrowing costs. The Fed is clinging stubbornly to the assumption that low borrowing costs will stimulate the economy -- though perhaps it is more wishful thinking than stubbornness, since the Fed has few other cards to play with the Fed's short-term lending rate already near zero.

Earlier Fed purchases of mortgage-backed securities helped drive mortgage rates to all-time lows, but this has not yet sparked a recovery in the housing market. Similarly, it appears that the general campaign to keep borrowing costs low has been a case of pushing on a string -- making borrowing cheap when there is limited demand for it.

As anyone in savings accounts, money market accounts or other deposit products will tell you, while these low interest rates policies haven't had much of a benefit so far, they've certainly had a cost. Low bank rates have kept interest rates on deposit accounts low. That has taken money out of the pockets of those depositors -- and effectively, out of the economy.

It's hard to say what will shake the economy out of its current doldrums. It is increasingly looking as though it will have to be some outside force, such as foreign demand. Still, that won't keep the Fed from continuing to pursue its low interest rate policies -- much to the chagrin of savers.

Apparently a lot of folks run their checking account balances close to the line.

An online July poll by the National Foundation for Credit Counseling found that 26 percent of Americans plan to opt-in for debit card overdraft protection, in spite of the hefty fees involved -- up to $35 each time the balance dips below zero.

New federal rules on debit card overdraft fees require banks to get your permission for overdraft protection. The requirement for new accounts went into effect July 1, and the rule for existing accounts goes into effect Aug. 15.

The rules came about after a storm of controversy erupted over the fees. Unbeknownst to many folks, banks automatically covered overdrafts on debit card withdrawals and purchases, then charged a fee each time. In some cases, customers racked up more than a $100 in fees in one day, not realizing their checking account balances were at zero each time their debit cards produced cash at the ATM or were accepted at the cash register.

Link Checking Account with Savings Account

Consumer advocates urge you to forego the overdraft protection programs and choose less-expensive alternatives, such as linking a checking account to a savings account to cover overdrafts.

"It is disturbing that this many people live so close to the financial edge," National Foundation for Credit Counseling spokeswoman Gail Cunningham said in a press statement. "The real answer lies in examining the root problem and resolving it."

Some polls estimate an even higher percentage of consumers living on the edge. According to a May survey by Credit.com, 48 percent of consumers planned to "opt-in" for overdraft protection.

Banks, meanwhile, project a big hit to their revenue as a result of the new law. Wells Fargo projects its fee revenue will drop by $500 million in the second half of the year.