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2018 Outlook - 6 factors affecting money market rates

Recent turmoil has put the investment spotlight clearly on the stock market, but some of the factors disrupting stocks could also make 2018 an eventful year for interest rates. This means you may face decisions that could make or cost you money over the coming year, as everything from savings and money market rates to mortgage rates could look very different a year from now.

What should you be watching to stay on top of these developments? Here are six factors that look like they might have a prominent role in the 2018 outlook for savings and money market accounts:

1. Higher oil prices

The price of oil rose by 12.5 percent in 2017, and continued to rise in January of this year. Oil is an important influence on inflation and, when inflation rises, interest rates are likely to follow.

Despite the increase in alternative energy usage, the rapid development of highly-populated countries such as China and India means demand for oil isn't going away anytime soon. Last year China surpassed the United States as the world's largest oil importer.

How this could hurt: Rising prices at the gas pump could push inflation and interest rates higher.

How this could help: There's not much positive about rising oil prices -- unless you work in the oil sector or own investments in it.

2. Rising wages

Average hourly wages were up 2.9 percent for the 12 months ending in January, 2018, the highest 1-year climb in wages since mid-2009.

Unemployment is very low, at 4.1 percent. The number of people who are working part-time when they would prefer to work full-time dropped below 5 million last year for the first time since early 2008. It peaked at over 9 million in 2009.

This demand for labor is pushing wages up. If immigration controls continue to tighten, labor for some occupations may become even harder to find.

How this could hurt: Companies could act to offset rising labor costs by increasing their prices. This risks creating an inflationary spiral that could offset wage gains.

How this could help: Rising wages are good for household budgets. Consumers may be inclined to increase spending.

3. Federal Reserve "normalization"

The Fed took extraordinary steps to lower interest rates in response to the financial crisis. It has since stated a goal to gradually return its rate policy to more normal levels.

The first phase of this, raising short-term rates, has already begun. A later phase involves reducing holdings in long-term interest securities the Fed accumulated as part of its quantitative easing programs. This later phase could have more impact on longer-term interest rates such as mortgages.

How this could hurt: For borrowers, higher rates mean their debt burdens would get heavier. If this starts to have a significant impact on mortgage rates, it could dampen the housing market.

How this could help: For savers, easing the downward pressure on interest rates could encourage more attractive rates for savings accounts, money markets and CDs.

4. Trade wars

In January, the government initiated tariffs of up to 30 percent on solar panels and 50 percent on washing machines. Those new levies may just be the leading edge of protectionist policies that have been promised since the presidential campaign. In turn, raising tariffs on imports is likely to prompt a response in kind from some countries, resulting in future price increases.

How this could hurt: Tariffs are inflationary, so this could add to the upward pressure on interest rates. That's a double whammy for borrowers, as both the cost of the goods they buy and the expense of borrowing to buy them could increase.

How this could help: Savers could see rates on deposit accounts rise in response to higher inflation, though this may represent keeping up rather than actually getting ahead of rising costs.

5. A declining dollar

Another factor that could make imports more expensive is the decline in the value of the U.S. dollar. Relative to the currencies of America's trading partners, the dollar has declined by around 10 percent since peaking at the end of 2016.

How this could hurt: A dollar with less purchasing power effectively raises the price of imports. This affects consumers generally by fueling inflation, and borrowers in particular by also pushing interest rates higher.

How this could help: Savers should benefit from higher interest rates, though this could be offset by higher prices.

6. Competition among banks

The latest MoneyRates.com America's Best Rates study found that savings and money market rates are rising particularly quickly among a handful of banks that are breaking away from the pack. For example, while the average savings account rate is now 0.274 percent, 15 of the 96 savings accounts in the study offer savings account rates of 1 percent or more.

How this could hurt: Bank customers who assume that rising rates will help all depositors risk missing out, since some banks are reacting much more slowly than others.

How this could help: Competition among the leading banks speeds the transition to higher rates, increasing the benefit to customers who shop for the best rates.

4 tips for succeeding in this rate environment

With signals pointing overwhelmingly toward higher interest rates in 2018, here are four tips for dealing with this environment:

1. Shorten the length of your interest-bearing investments
If interest rates on CDs are rising, it's best not to lock into long-term commitments at today's rates. Similarly, in the bond market shorter-term maturities give you more flexibility than longer-term ones.

2. Shop actively for the best interest rates on savings, money market, and CD accounts
When rates rise, some banks react more decisively than others. There is money to be made by switching to the banks that are leading the charge toward higher rates.

3. Rein in debt
Borrowing gets more expensive when rates rise. This is a good time to be paying down debt rather than taking on more.

4. Lock in rates on borrowed money
If you must borrow, try to lock in rates before they rise. This means acting on mortgage decisions before its too late. It also means favoring fixed over adjustable rate mortgages, and loans rather than credit card debt.

Once the economy settled down after the Great Recession, it went through a period of remarkably low and stable interest rates. For 2018, expect rates to be neither as low nor as stable as we've seen in recent years.

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