Money market interest rates cannot remain low forever

Interest rates in money market accounts as well as money market funds have gone really low and are probably the lowest in comparison with any other investment.  At one point in time, these were considered the most decent investment options but now they pay as much as a standard savings account.  Prior to the great recession the money market rates were very different and hence it becomes all the more painful to see interest rates drop to such a low.

The one thing that the low interest rates does is that it punishes the savers while rewarding the borrowers and this in turn encourages people as well as businesses to spend more money.  The interest rate is intentionally kept low by the federal government in order to merely boost the economy.  The only good news is that these interest rates in the US as well as the rest of the world cannot remain low forever.

Historic lows seen in money market interest rates:

Due to the actions of the federal government the interest rates in money market accounts are at their historic lows.  The interest rate or the Fed Funds Rate is set by the Fed Reserve and this is the rate that the banks charge one another on the short-term loans in order to facilitate the movement of money across the nation.

The prime interest rate is set by the banks using the Federal Funds Rate.  The prime interest rate drives all financial products such as mortgage loans, Treasury notes, as well as money market accounts in the US.  So, when the Federal Funds Rate gets higher the impact is felt everywhere.

Interest rates in money markets cannot remain low forever:

Due to the poor returns on money market accounts investors are opting out of it and seeking investments that offer better returns.  This will now lead to the banks offering better interest rates in order to lure the investors back into money markets and thereby stop the outflow of money.

The money that the banks lend for homes and cars, are basically from Certificates of Deposit and from the money market accounts.  Once the economy improves, banks will have to start lending money again and for that they will require more money from investors.  To get more money, they will have to increase the interest rates once again on these investments such as CD’s and money market accounts.