Money Market Interest Rates Cannot Stay Low Forever

Investors have suffered through horrible interest rates for several years now and there are hardly any rates lower than money market accounts and money market funds. The pain of low money market rates would not be so hard to bear, either, had these accounts not been paying a decent rate of return before the Great Recession. Unfortunately, these once decent investments hardly pay more than a standard passbook savings account.

Low interest rates reward borrowers and punish savers and are designed to encourage people and businesses to spend money. The federal government has tried to keep interest rates low in order to boost the economy. The good news is interest rates in America and around the world cannot stay low forever.

Money Market Interest Rates Are At Historic Lows

The rates of return on a money market account are at their historic lows because of the actions of the Federal Reserve. The Federal Reserve sets the Federal Funds Rate, which is the interest rate that banks charge each other on very short term loans to facilitate the movement of money around the country.

The Federal Funds Rate is used by banks to help set the prime interest rate, which drives almost every other financial product in the United States from Treasury notes, mortgage loans and eventually money market accounts. When the Federal Funds Rate starts to edge higher, these other interest rates follow suit.

Money Market Interest Rates Cannot Stay Low Forever

Like with the laws of supply and demand, investors will leave money market accounts, and recently have been, to seek out higher rates of return on other investments. This outflow of money will eventually help money market interest rates begin to creep higher as banks attempt to lure the money back.

Banks use money market and certificate of deposit accounts to help them lend money for things like homes and cars. As the economy continues to improve and banks begin lending more money again, they will need more money from depositors. In order to get this needed money, banks will have to once again raise interest rates on money market funds and certificates of deposit in order to attract those customers who have been on the sidelines waiting.

Money market account rates and other interest rates on investments have been at historically low levels for the past several years, but those days will eventually end. While no one can be sure when the tide will turn on money market interest rates, it is safe to say that the interest rates will once again rise as the country and the world’s economic conditions begin to change and recover.