A Story About Savings Accounts
Print View - Published: Wed, 5 Jan 2011 at 11:02 PM
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For many money-savvy Americans, the current interest-rate environment is very frustrating. Imagine spending years being frugal and responsible with your money, spending as little as you can and saving as much as you can, only to be rewarded with a savings account rate of 1.25%. Very frustrating indeed. Even online savings accounts, which typically offer better yields than traditional savings accounts, are offering less than 2%.
There is a common trend in the banks at the moment which has to do with savings accounts and savings interest rates. If you keep your savings with the same bank in the same account for a number of years, you would expect your bank to look after you. But they do not and actually take advantage of this.
The situation with Certificates of Deposit (CD's) is no better.
The reason for the lousy rates is quite simple: the Federal Reserve is currently letting banks borrow at no more than 0.25%. So, if a bank can borrow at 0.25% -- which is the current fed funds target rate -- why would it borrow money from you at 5% via a savings account or a CD? That's the gist of it. This is why CD and savings-account rates rise as fall in tandem with the target fed funds rate, the Fed's most important monetary policy tool.
The banks release a savings account. They advertise it, use it to attract new customers or convince existing customers to transfer their savings to them. The customers, being quite happy with the rates and the terms, forget about their savings interest rates knowing that they have the return that they expected.
So the big question is: when will savings rates start to rise?
The answer, unfortunately, is not any time soon. Any experienced rate watcher will tell you that the Fed is going to keep the benchmark fed funds target rate at 0%-0.25% for the rest of the year, and probably well into 2011. The fed funds futures market, a very good predictor of where interest rates are headed, is currently 100% certain that the Fed will keep short-term rates at record low levels for the rest of 2010.
Then after 6 months to a year the bank get bored of that savings account and decide on the next big marketing push and release another type of savings account. The terms maybe a little different. The savings interest rates is usually different. And the same thing happens again, attracting new customers etc.
Who's to blame? Why, the Great Recession, of course. The Fed can't raise rates while unemployment is high, economic growth is weak and the very real threat of deflation persists. Moreover, many seasoned economists believe that the very recent Great Recession will soon become the Great Double-Dip Recession.
The Fed is just as frustrated as the unnumbered folks around the country trying to find stronger yields for their hard-earned savings. The Federal Reserve is currently dealing with what's called a liquidity trap. It has lowered rates as much as it can, and has pumped massive amounts of new cash into the economy. Despite these actions, the economy is still not expanding in a sustainable way. That's the trap. It's the same trap that has kept Japanese central bankers scratching their heads in frustration since the 1990's.
But what happens to the old savings account?
And if you think you might do better with US Treasury securities, think again. The Fed has been pumping many billions into Treasury securities, thus driving the yields associated with these super-safe investments down. This not only keeps mortgage rates low, which is good for the languishing housing market, but it also makes Treasuries less appealing to investors. To help bolster the anemic US economy, the Fed would much rather prod Wall Street to put its money into riskier investments like stocks and corporate securities, which aren't as safe as Treasuries but do offer higher yields. The Fed wants your 401K to look like it did back in 2006, which would certainly help to make you and millions of other American feels prosperous again.
About the Author
There is a large amount of information online about savings accounts including recent studies by Michael Pryoor on Savings Bond Interest Rates and Best Interest Rates For Savings.nGet a Unique Version of this Article Article Submission
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