Q: The news has been full of this 'quantitative easing' program the Federal Reserve is starting. They say Ben Bernanke wants to lower interest rates. Lower than what? Aren't they already low, and does this mean I can expect my money market rates to slip even further?
A: The Federal Reserve's quantitative easing program is designed to lower interest rates in an attempt to stimulate the economy. Whether this will affect money market accounts, along with other deposits like savings accounts and CDs, is an open question. There are two reasons why you probably don't have to worry about money market rates getting significantly lower because of quantitative easing:
- Money market rates, like the rates on short-term CDs and savings accounts, are already extremely low. According to the FDIC, savings accounts nationally averaged 0.17 percent as of December 6th. 1-month CD rates were even lower, at 0.14 percent, and money market rates were at 0.24 percent. These are all short-term rates, and the Fed recognizes that short rates are already about as low as they can go, which is why quantitative easing is designed to address longer-term interest rates through intervention in the bond market.
- A funny thing happened on the way to quantitative easing. Since the Fed announced its program on November 3rd, 10-year Treasury rates -- the type of rates the program was designed to drive downward -- have risen by 0.50 percent. There are a number of possible reasons for this -- speculation before the announcement, changing views on the economy, slackening demand from concerned foreign investors, etc. Whatever the reason, it is a reminder that it is a risky game for the Fed to intervene in a freely-traded market -- especially one with volume as huge as that of the Treasury bond market.
For now then, signs point to the effect of quantitative easing on money market accounts and other deposits being minimal.
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