Interest rates in money markets wouldn’t stay low forever

Investors have seen massive decline in interest rates for quite a few years now and it is hard to find lower interest rates than money market funds and accounts. Lower money market rates would have been more bearable if they weren’t paying so handsomely prior to the start of the great recession. That is what makes the current passbook savings levels that even decent investments pay these days, harder to digest. In fact these lower interest rates are punishing towards those who save money and reward those who borrow money, thereby allowing people and even businesses to spend more money. It has also been a conscious effort on the part of the federal government to keep interest rates low enough to give the economy a real boost. However, those suffering from low interest rates can take heart from the fact that these rates cannot stay so low forever.

The interest rates and returns that one gets on money market accounts are touching historically low levels because of the Federal Reserve’s actions. In fact it is the Federal Reserve which sets the rate based on which banks charge each other on short term borrowing facilitating the movement of the money all around the country. The Federal Funds Rate as it is known is what is used primarily to fix the prime interest rate that drives almost all the other financial instruments in the country, whether it is money market accounts, mortgage loans or even treasury loans. So, one can expect the interest rates to rise once again when the Federal Funds Rate inches higher.

Just like the age old demand and supply rule, investors will leave money markets in the quest for higher interest rates or returns on investment. As banks would try to attract customers, this would again cause the interest rates offered by money markets to inch higher. For cars and home loans banks usually prefer the certificate of deposit accounts or CDs and the money markets. As banks loosen their credit standards and start lending money once again, money from depositors would be required too. That means banks will have to once again shift to higher interest rates on the money market funds to lure depositors who would provide the necessary cash required to lend out the money. This means that the historical low levels of interest returns wouldn’t last for long and the rates will rise again.