Treasury Yields are Moving Higher, Will Savings Rates Also Go Up?
Long term U.S. Treasury yields have moved higher the past several months as savings rates remain stable. Will savings account rates move higher in the future? The answer to that question is yes but not during 2013. The main reason savings rates will remain where they are for the rest of 2013 is the unemployment rate.
You may be wondering what the unemployment rate has to do with where savings rates are but there is a direct cause - the Federal Reserve. The Fed has a dual mandate of low unemployment and moderate long term inflation. They are able to achieve their mandate by increasing or lowering interest rates.
When unemployment is very low and inflation is a concern, the Fed increases the fed funds rate to slow demand for goods and services, which in turn slows growth and the potential inflation threat. When the unemployment rate is high (currently it's 7.7 percent) and inflation isn't a concern, the Fed lowers the fed funds rate to simulate growth.
The Fed's increasing and lowering of rates happens in cycles known as tightening and easing. Tightening occurs when growth is strong and easing happens when growth is weak. The Fed's current policy is easing and has been for several years because we've suffered the worst recession since the Great Depression of the 1930's.
Along with other polices designed to drive long term interest rates lower, the Fed has been easing by keeping the fed funds rate near zero percent. The Fed's actions have driven savings rates and rates on interest-bearing assets down to record lows. Right now, the best savings rates available are just over 1.00 percent - a far cry from a few years ago when most banks were offering savings rates three times to five times that amount.
The Fed plans on keeping interest rates low until the unemployment rate falls below 6.5 percent, which they believe will happen at the end of 2015. We believe the unemployment rate will fall below 6.5 percent before then, which will cause the Fed to act sooner. We believe the Fed will start increasing the fed funds rate sometime in 2014 as unemployment falls, the economy grows stronger, and Treasury yields move higher.
Interest rates moving higher will be welcome news for all since we have lived with the lowest rates in over a generation.
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