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Will money market rates be a victim of the Fed (again)?

September 13, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Some very prominent investment experts are forecasting additional moves by the Fed to lower interest rates. If they are right, you would want to close your money market accounts and savings accounts, and put the money into long-term CDs before rates drop further.

Before you do that, though, you'll want to consider the value of those forecasts.

Goldman Sachs, PIMCO and Bank of America all expect the Fed to get even more aggressive about buying bonds to drive down market yields. The idea is that driving down yields will lower borrowing costs and provide stimulus to an economy that seems to be teetering on the brink of a relapse into a recession.

What to do if you buy the hype

The national average rate on savings accounts is 0.18 percent, according to the FDIC. Money market rates average 0.26 percent. At those levels, there isn't much room to fall, so don't expect Fed policy to drag savings account and money market rates down too much further.

However, the best CD rates in the five-year range are still up around 3 percent. If the analysts are right, 10-year bond yields could be pushed down to around 2 percent, which would probably mean those long-term CD rates would fall as well. This would argue in favor of locking up CD rates at today's levels.

A contrary view

On the other hand, there are reasons to take those high profile predictions with a grain of salt:

  • Recently, there have been signs that the economy might be coming around without further intervention.
  • Investment firms sometimes have a way of hyping certain trends. Goldman Sachs, for example, made headlines a couple years ago by predicting that oil would reach $200 a barrel. As a leading bond manager, PIMCO wouldn't have much incentive to promote a bear market for bonds.
  • When an outcome is widely expected, it is already reflected in market prices. In other words, bond yields have already fallen a long way on the expectation of a weak economy. They may not have much further to fall.

In short, you should think about bond market trends when making decisions about your deposit accounts, but don't necessarily believe everything you hear from Wall Street.

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