Warning: High Interest Savings Accounts Headed This Way
May 17, 2010
When the New York Times is running the headline "Interest Rates Have Nowhere to Go but Up," it can be expected that people who are looking for higher interest savings accounts will experience a perking up of the ears. Savings rates have been languishing for years.
However, higher savings rates may not be an unmitigated good thing for all savers. In order to understand the impact higher interest rates could have on your bottom line, you must think beyond the obvious.
Bill Gross Thinks Interest Rates Will Go Higher; Many Agree
The star of the above-named NYT story is Bill Gross, the boss at giant investment firm PIMCO, which recently gained the distinction of having more than $1 trillion in assets under its management. Bill Gross predicts an "extended climb" for interest rates, and when Bill Gross talks, people listen.
Morgan Stanley's research division has predicted that interest rates may rise by a full one point by the end of the year. Savings rates a full point higher?! Fantastic!
Right? Yes, but:
Higher Rates Could Be Dangerous if Inflation Becomes a Problem
If the price of stuff goes up, the value of savings accounts goes down--that's pretty much been the formula. You were, after all, saving that money, one would think, so you could later use it to buy something, whether it's a down payment for a house, an emergency fund in case you lose your job, or medical costs when you're retired.
Fortunately, the answer to the question of whether inflation will become a problem is much less agreed-upon than whether interest rates will rise. If savings account rates go up but prices do not go up, savings investors could find themselves sitting pretty.
