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How low can interest rates go?

The Fed's announcement spells more bad news for savers -- but good news for homebuyers.

By MSN Money Partner Jan 26, 2012 12:13PM

This post comes from AnnaMaria Andriotis at partner site SmartMoney.


SmartMoney on MSN MoneySaving money may soon get even less rewarding. The Federal Reserve's announcement Wednesday to keep short-term interest rates near zero through 2014 may result in still lower interest rates on bank accounts, analysts say.


How low? Rates on savings accounts may drop closer to 0% over the next 12 to 18 months, says Dan Geller, executive vice president at Market Rates Insight.


Even though the federal funds rate has been stuck at 0% to 0.25% since late 2008, banks continue to lower interest rates on their accounts. The average rate on savings accounts is 0.36%, down from 0.4% in November, according to MRI. One-year and five-year certificates of deposit have an average yield of 0.33% and 1.57%, respectively.


Even worse, savers will have to put up with nearly nonexistent returns for at least another three years before they can see any meaningful improvement, says Greg McBride, senior financial analyst at Post continues below.

What's a saver to do?

In general, advisers still recommend that emergency funds -- money to cover about six months' worth of living expenses -- be held in bank accounts where the principal is 100% guaranteed. Given that rates are expected to stay low for the long run, stashing that money in a CD comes with less risk, because the saver is unlikely to miss out on rising rates elsewhere and because several banks, including Bank of America and PNC Bank, allow customers to withdraw money from a CD without incurring a penalty. Other banks, like Ally Bank and Sovereign Bank, are telling customers that if rates do happen to rise, they'll raise the rate on their existing CD as well.


For customers on the hunt for safety, yield and liquidity, one account stands out: Capital One is offering a 1.01% rate that's guaranteed for one year on its high-yield checking account. Meanwhile, the highest rate on savings and money market accounts is 0.90% at Sallie Mae and Discover Bank, according to


Experts also suggest looking at community banks and credit unions that may promote higher rates in an attempt to land more customers.


Good news for homebuyers

While the rewards of saving are meager, borrowers may be able to benefit from these lower rates, at least in the near term. The Fed is hoping its rates will stimulate lending, in particular nudging more would-be homeowners into signing up for mortgages. Because the Fed is keeping interest rates low, banks are more willing to lower the rates they charge on mortgages, says Geller, which could lead to more lending activity.


Mortgage rates are already at record lows, but Geller says borrowers could see them drop even further, with mortgage rates falling by as much as 50 basis points. Here's why: In general, banks have at least a 3-percentage-point spread between the rates they offer on their deposit accounts and the rates they charge on mortgages, says Geller. That spread is currently at 3.5 percentage points, he says, so it still has some room to drop.


More on SmartMoney and MSN Money:

Jan 26, 2012 1:39PM

One year super Jumbo CD rates are currently down to around 0.030%, one more rate decrease and we'll be paying the banks a monthly savings service charge to keep our money. This FED system has basically destroyed the life savings of every middle class American, especially in the last 11 years (the last decent rates were in 2001). No matter what EITHER political party tells you, no one cares about the middle class or protecting the buying power of the working wage earner.

Oh, yeah................reward those who borrow and penalize those who save.................standard logic for federal gov!
Jan 26, 2012 2:50PM
Wait a minute. The banks can borrow from the fed at 0%. They loan money out at anywhere from 3.5 (mortgage which they immediately sell to a broker) to 19.99 (Credit card) and they will lowere interest on savings accounts. Does anybody else see the greed and Fraud in this? It may be time for another round of EVERYBODY switching to credit unions.
Jan 26, 2012 3:39PM

What I do not understand is how the fed borrows money from foreign countries with interest. Then lends money to the banks for no interest. Makes the tax payers pay the interest on the foreign loans. The banks loan the money to tax payers with interest. Now the banks do not have to give interest on savings accounts held by tax payers. Am I the only one that sees a problem with this?

Jan 26, 2012 2:10PM
At the rate things are going it might just be better to start stuffing mattresses than to put your money in the bank. They charge a fee for virtually everything and now it is getting where they want to penalize you for using your money to make themselves even more money!
Jan 26, 2012 2:28PM

Ben tanks for helping the rich bankers and wall street. The tax payers need to raise hell.

Best Regards 99%

Jan 26, 2012 2:32PM
Call your congress person never mind they do not give a rat -ss
Jan 26, 2012 2:33PM

Interest rates ARE nothing.


Houses ARE a dime a dozen.


Mortgage rates ARE superb.


Jobs ARE dying.


People who qualify ARE fewer and fewer.


Economic matters ARE worsening.


Buying a house is still risky now.  Even the so-called niche jobs ARE affected by everything else.


The whole thing is a crap shoot, readers, but the very best of luck and life to all.

Jan 26, 2012 2:26PM
BOBH501, I diversify my funds.  I have money on 3 different mattresses..
Jan 26, 2012 2:02PM

How do we get rid of Big Ben?  He is obviously in the pocket of the wall street robber barons screwing the middle class saver!!! 


Those who have bought homes because of the low interest rates are now done.  A slight RISE in interest rates might get those waiting for a better hand-out from the gov get off the fence.  I hate the banks and all their theiving ways.

Jan 26, 2012 2:07PM
Just another way to make sure the middle class is sc$$$ed by our government.
Jan 26, 2012 2:44PM
HE!! at what my bank has been paying the past several years it wont be long before they start charging me a monthly fee on my accounts.
Jan 27, 2012 1:02AM

This works out just GREAT. The banks can borrow money from the FEDS at almost nothing, charge the consumers outrages interest fees, and pay the consumer very little in interest, while they charge outrages fees.   Then give the CEO’s an outrages bonus.

Jan 26, 2012 3:20PM
at these rates, i can't even afford a mattress...bummer.
Jan 26, 2012 3:39PM
Am I missing a point here. The Federal Reserve is lowering the interest rates so these ***** banks can loan money at a decent rate and the banks still go and screw the general public, the so often referred 99%, with HIGH interest rates...but then again, they are in bed with congress, so no stopping the banks! They win, we loose. Nothing new since the stone ages.
Jan 26, 2012 3:14PM
You might as well put your money under your mattress, this way the government has no way of knowing what you have...Why give it to the banks so they can charge you 18%.and the IRS charges you 30 % on the interest.
Jan 26, 2012 4:11PM
Thirty - Forty years ago it was quite reasonable to be paid 5-6 percent on the average passbook savings account. But that was before our government removed the controls and regulations that were placed on the financial institutions. And too this day it still amazes me how the banks back then all managed to make money without gouging their customers.
Bernanke's goal is to destroy our assets and bankrupt the vast population. Obama is letting him do it! Time for change!!!!!!!!
Jan 26, 2012 2:42PM
We used to hear that "nobody borrows unless somebody saves". Where then, is the money to be borrowed coming from? Will low borrowing rates re-start a trend toward   too much debt for some individuals? Will credit card interest rates show downward movement? I have neighbors who are in their late 70s and were counting on bank interest to generate important supplemental amounts to their monthly income. Are they now facing having to venture into higher risk investments to maintain their standard of living? My state's employee trust  fund had to reduce monthly payments to retirees for the first time in history following the financial mess of 2008-09. Now, it appears there will be another reduction  when adjustments are made in May of this year. Are we going to make the old line about having to pay banks to take our money for no return a fact of financial life?
Jan 26, 2012 4:38PM

Here are a couple of reasons that the NON PROFIT credit unions don't pay corporate taxes.

  • Credit unions' board of directors serve as unpaid volunteers, elected by members. Credit unions return all excess income to members, in the form of higher deposit rates, lower loan rates, and lower fees. Credit unions don't need to create profits to pay stockholders, as do banks.
  • The amounts banks pay stockholders dwarf their tax bills: Over the past five years, they've paid almost $71 billion more to stockholders than in taxes.
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