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The recently appointed Federal Reserve Board Chairman, Ben Bernanke, recently led an effort to raise short-term interest rates to 5%. By no coincidence, firms offering the highest money market rates have also been advertising products that approach or exceed a 5% yield. Just prior to the Memorial Day weekend, the national average for money market accounts reached 3.19%, but the highest money market rates of 4.65% (APY) was available through the FDIC insured Emigrant Direct. In the last six months, the APY has jumped almost 2%, and it has been five long years since money market rates have reached this point.
Consequently, many banks have been forced to raise the rates offered through CDs to be competitive with money market rates. According to Bankrate.com, a dozen banks are offering one-year CDs with APYs in excess of 5% and up to 5.41%. CDs and money market accounts have very similar characteristics, with the significant exception that CDs are illiquid and investors must pay a "substantial penalty for early withdrawal." CD rates will exceed money market account rates on most occasions because banks must offer the highest money market rates to those that commit to keeping their funds on deposit for a fixed period of time.
Opening a Money Market Account - Money market accounts (MMAs) at banks, which are sometimes referred to as money market deposit accounts, are deposit accounts insured by the FDIC that can be liquidated at any time. MMAs should not be confused with money market fund accounts that are sold by a range of financial institutions, including banks, and are not insured by the FDIC. In fact, MMAs resemble traditional, insured passbook savings accounts, but the investments are in short-term low-risk securities such as commercial paper, treasury bills and certificates of deposit that produce a slightly higher rate of return compared to savings accounts. When comparing MMAs, examine the MMA yield or APY, which will be higher than the rate listed in the bank's promotion because the yield accounts for the compounding of interest. Daily compounding of interest will produce a higher yield for the account holder if all other factors are equal. Because investment fees can severely negate returns, investors searching for the highest money market rates should also avoid accounts that require substantial minimum balances.
Disclaimer - The information on this site is believed to be accurate, but no warranty is made regarding rates, terms or features of any financial product. Carefully read the prospectus for any financial product before investing. The best money market rates, accounts, and funds are determined by individual needs. Tax, financial and legal advisors should be consulted before making any investment. |
