Interest rates in money market accounts will depend on the federal reserve

The forecast for money market accounts have been that they are likely to go up in 2011.  If there is continuous improvement in the economy, then the money market funds will have to go up.  But the money market accounts generally have investments that are short term and hence their yield is also short-term interest rates that have been kept exceptionally low by the Federal Reserve for a considerable period of time.  However, the stagnant rates are only partly due to the rate policies by the fed.

After the collapse of the Lehman Brothers during September 2008, at least 36 money market funds also ‘broke the buck’ as per the report by Moody’s last August.  To break the buck means that the clients did not even get back one dollar for each dollar that they had put in.  There was only one fund that did go down below the $1 per share and that was the Reserve Primary Fund which had held around $785 million in securities in Lehman Brothers but was unable to meet investor demands for redemption.  The investors in this fund managed to recover 98 cents instead of a dollar for each share.  This was as per the announcement made by the Securities and Exchange Commission in the early part of 2010.

The direct fallout of that fiasco was more stringent guidelines on the money market funds that were imposed by the SEC.  From May 2010, money market funds will have to invest only in high-quality investments that are short-term and keep a percentage of these funds in investments that could be liquidated at a short notice.  The rates in money market funds would be low and an improvement in the yields in money markets is not in the anvil as of now.

There is going to be no improvement in the money market yields because the Fed is planning to keep the short-term rates as low as possible due to the stricter rules that are in place now.

Under normal circumstances money market funds were a perfect place for investors to park their cash, where they got a slight yield bonus on savings accounts as well as money market accounts (federally insured) that were offered by the banks.  But now the investors have very little option to park the money and in fact the yields from the money market funds make them feel queasy.