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Last year, it was a foregone conclusion. The Fed was going to make sure that inflation never got started. The Chairman of the Federal Reserve, Alan Greenspan, was about to retire, and he certainly wouldn't let his legacy get punished by an emerging round of inflation. So, the Fed was going to be aggressive in raising the federal funds rate and heading off the potential inflation, even if no clear signs of rising prices were present. Along the way, money market rates have also been climbing, and conservative investors around the world have been cheering improving returns. Now that Ben Bernanke, the new Fed Chairman, has proven his inflation fighting credentials by leading the Fed in raising the federal funds rate twice, inflation seems contained and investors are increasingly uncertain about the future of money market interest rates.
When the Fed raised rates for the sixteenth consecutive time on May 10, the story made front-page news, but the money market yields produced as a reflection of rising federal funds rates are also headlines. With the six-month jumbo CD average recently closing above 5% for the first-time since February 2001, money market investors should be paying close attention to economic forecasts - and they are.
Good Growth with Contained Inflation - When the Commerce Department report showed U.S. gross domestic product jumped 5.3% in the first quarter, and the Fed Chairman commented that long-term inflation was well contained on May 26, financial market makers began to consider the possibility that another Goldilocks economy might be on the way. Meanwhile, inflation concerns caused by the U.S. economic growth spurt, and the potential of more rate hikes by the Fed, are helping to prop up money market rates. While high-yield money market returns have fluctuated with the uncertainty in the money markets in the last two weeks, rates are likely to stabilize in the near term as the Fed ponders it's next move.
Money Market Rates Will Stabilize - If inflation is under control, as the Fed Chairman suggests, money market rates are likely to settle into a predictable range for the foreseeable future with the Fed adopting a posture of ongoing monetary vigilance. Interest rates could certainly be raised modestly in such an environment, but the Federal Reserve would risk driving the economy into another recession if it were too aggressive. For now, fixed-income savers have a reason to celebrate. Yields should maintain current levels for the next several months to come.
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 product before investing. The best money market rates, accounts, and funds are determined by individual needs, and tax, financial and legal advisors should be consulted before making an investment. |
