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Inflation is Creeping Up, Deposit Rates Will Move Higher in Early 2015

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Inflation rose in June in part because of the increase in gas prices. Even taking out the sharp gas hike, the core CPI index still showed an underlying buildup of inflationary pressures. This is welcome news for those looking to the Federal Reserve to increase the federal funds rate, which will force savings rates and money market rates higher.

For many years, post recession deflationary pressures caused the Fed to keep their key benchmark interest rate near zero percent. This policy forced savings account rates, money market rates, and CD rates to record lows. Now we can finally look forward to higher rates.

Higher inflation, a lower unemployment rate, and stronger GDP growth are all pointing to higher rates sooner than later. The time frame for higher interest rates keeps moving up. Forecasts earlier this year were for interest rates to move higher at the end of 2015. That expectation moved up a few months ago to the summer and with the latest string of better-than-expected economic news, we may actually see higher rates in early 2015.

Whether or not this comes to fruition remains to be seen but it's certain that higher rates are coming. Keep your cash in variable interest rate accounts such as savings account or money market accounts. For a longer term and marginally better rates, an option would be short term certificates of deposit.

The best CD rates available on 12 month certificates of deposit are only slightly higher than the best savings rates. For example, the highest savings rate on the rate table is at 0.95 percent APY and the highest 1 year CD rate is at 1.10 percent APY.

Staying invested in shorter term CDs or variable rate accounts will position you to take advantage of higher deposit rates when they do arrive. Don't lock your cash into long term certificates of deposit at these current low rates. The highest 5 year CD rates right now are just above 2.00 percent. By the end of 2015, variable rate accounts and short term CDs will be just above 2.00 percent.
Author: Brian McKay
July 23rd, 2014