How low can interest rates go?
The Fed's announcement spells more bad news for savers -- but good news for homebuyers.
This post comes from AnnaMaria Andriotis at partner site SmartMoney.
Saving 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 Bankrate.com. 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 Bankrate.com.
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.
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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.
You think 3 years from now interest rates are going up?
Japan has been waiting DECADES now. They also have a problem called ZERO INTEREST rates. They alsohave a stock market problem 40,000 to now 8000.
It's what a country does when they cant solve a problem.
You now have the problem.
Urtheproblem, What you dont realize is that this all started by everyone wishing they could buy what ever their neighbor had. Bigger house, I want one, faster car, I want one
EVERYBODY Urtheproblem? You been at the pub too long? Not EVERYBODY has the LUXURY to wish they had what their neighbors have...you know, the big houses, etc.?
There are a lot of people who just wish they could put a hotdog on the table in front of their kids. You have a hellova nerve pointing fingers at the rest of the world. I can almost bet YOU are the leader of that pact...and you laugh like a hyena. They make pills for your kind of illness.
Would we be in a depression if the fed didnt print money up?
Did the Tarp and stimulus solve any of the major problems? Except keep the bankers out of prison and make them even richer.
What do you think is about to happen?
Dont even think about having money in the stock market. Keeping your money is more important than an unrealistic dividend. You think thats safe you need a rubber room. 80% haircut coming.
The Fed has a plan. Keep the bankers floating and Sink YOUR BOAT.
An example this economist used during the speech I referenced was General Motors. GM makes more money from their affiliate company GMAC that originaly started out as a lending company to help people buy their cars. They quickly figured out they could make even more money if they lent money for everything. GMAC makes GM more money than they make building and selling vehicles. General Electric does it, Exxon does it, all companies are in on it.
Pay off your debt. 1% interest rate to save while paying 5-30% interest on debt is a no brainer. Pay off your debt then worry about saving.
Zero interest rates, no job creation=Disaster.
Obama said he created 3 million jobs, he can say anything, He my as well just say 100 million jobs because its all hot air.
Wait when unemployment hits 5%, you think thats good? Those people are now under-employed, and unemployed with no money to stimulate the economy. It's a no win situation.
The banks saved themselves and ruined the World.
All you can do now is keep your money, if you got any left. Capital preservation, forget about those dividend stocks. Those yesterday fan favorites are going down 80% and not coming back.. If you need a 5% return, sorry you didnt save enough.
Less rewarding than what? Savings accounts yielded a whopping 7% interest when I was growing up. 1% doesn't even stand a chance beside the fees they take to "allow" you to put YOUR money there!
When they start seeing people put their money under their mattresses or in the backyard again, (you earn just as much as the banks give you these days....zilch!), then maybe they'll change their tune. But as long as nobody balks about it, it's like everything else...they take and take and take until you just don't have anything left for them to get.
.....and at the same time the bank gets a hefty returne for investing your money while giving you nothing in returne. Why? Because they can and will screw you every time they can. After all, that is what being a Corperate Pig is all about. Screwing you out of your money.
All Corperate Pigs are set up this way. It is just the different ways that they do it to you that make them different to each other. Corperate Americe is not here for you. They are here for them selfs. Just like they are a seperat country.
I watched a speech by an economist named Richard Wolfe the other night that was filmed in 2009. I thought it was the best explanation of what led us to where we are now. Basically he said that companies have figured out that in lieu of paying workers a living wage and increasing pay through time they would just lend workers easy money. So in order to keep up workers have to borrow and that in return the companies made even more money - through paying low wages and on the interest paid on the borrowed money.
Working toward slavery. The best investment is what Dave Ramsey preaches - Debt Free. As long as you owe someone money you have no money.
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