Five Questions and Answers About Bank Rates in 2010
January 26, 2010
As 2010 gets underway, the outlook for bank rates and the economy is already more optimistic than it was heading into last year. But large economic uncertainties mean there are still some big questions about where savings account rates, CD rates, and money market account rates will go this year.
Here are five key questions that depositors have, answered.
Q. Will bank rates rise in 2010?
A. The answer to this is almost certainly yes. At the end of 2009, US savings account rates averaged 0.20%, 1-month CD rates averaged 0.25%, and money market rates averaged 0.34%. These are all so extraordinarily low that historical probability would suggest they are more likely to rise than fall. Beyond that, economic signals point toward higher rates--especially strengthening economic growth and the reemergence of inflation.
Q. Are higher bank rates up to Ben Bernanke?
A. Not really. The press often writes about the Federal Reserve "setting" interest rates, but the Fed only controls very short-term rates used by banks. For the most part, interest rates are set by market conditions, and even the rates the Fed sets are dictated by economic circumstances.
In 2009, the Fed had an unusually strong influence on interest rates, not only because it kept short-term rates low but because it also took the unusual step of buying US Treasury bonds to try to drive longer-term rates down. This seems to have had some impact, as 30-year mortgage rates--which have more in common with bond rates than with short-term Fed rates--reached record lows in 2009, according to Freddie Mac's mortgage data.
Of course, the federal government owes too much money to sustain the trick of buying its own debt indefinitely. Also, as the economy and inflation both strengthen, it will become more difficult for the Fed to hold back the tide of higher interest rates--and there will be less incentive for it to try to do so.
In short, rather than watching the Fed, watch what the Fed is watching.
Q. What is the key to the economy sustaining its recovery in 2010?
A. Two words: job creation.
We've already seen improvement in early-stage indicators like consumer confidence, provided by the Conference Board. Confidence is important to an economic recovery, but ultimately it must be based on something. With consumer balance sheets still carrying pretty high-debt positions, a sustained recovery must be based on income growth, not simply a greater willingness to spend. Improvement in the job market is the most direct way at this point to create more income to fuel the economy.
Q. Will economic growth mean the return of inflation?
A. The simple answer is yes. Deflation is a highly unusual state of affairs, and by the end of 2009, inflation had reestablished itself. However, that doesn't mean inflation has to get out of control as the economy strengthens. The second half of the 1990s saw sustained economic growth with minimal inflation, so it is possible to have the best of both worlds.
Q. Are higher rates more likely to be offered by big banks or small banks?
A. One thing's for sure: the best rates will be offered by the healthiest banks, since the Federal Deposit Insurance Corporation (FDIC) is capping the rates that can be offered by institutions that are not well-capitalized. Whether the healthier banks are big or small depends on case-by-case circumstances, which is why Money-Rates.com casts a wide net when compiling interest rate information for savings accounts, CDs, and money market accounts.
