Why Money Market Rates Will Not Stay Low Forever

Why Money Market Rates Will Not Stay Low Forever

Investors have suffered through low money market rates for years now, but interest rates in the United States and around the world cannot stay low forever. Low interest rates reward borrowers and punish savers which is a combination designed to encourage people and businesses to spend money and boost the economy.

Why Money Market Rates Are Currently At Historic Lows

Money market rates continue to stay at historic lows because of the Federal Reserve. The Federal Reserve sets what is called the Federal Funds Rate which is the interest rate that banks charge each other to move money back and forth in short-term loans. Banks also use this rate to help them set the prime interest rate which most other financial products such as Treasury notes, home mortgage loans, and even money market accounts are based off of. When the Federal Reserve raises the Federal Funds Rate, the only interest rate they actually control, all other rates follow. So until the Federal Reserve makes a move, no other rates including money market rates will rise.

Why Money Market Rates Can’t Stay Low Forever

Banks will again start lending money to more and more customers as the economy continues to improve. With the eventual influx of a need for new loans for homes, cars, business, and other reasons, banks will need money from depositors to lend. This is an example of classic supply and demand. Because banks will need more deposits, money market rates will eventually rise as demand increases for loans. Banks will not have the deposits to lend if they do not entice customers to keep their money in their vaults. This will ultimately raise the interest rates that investors earn on money markets and savings accounts.

When Can You Expect Money Market Rates To Rise?

No one knows for sure when money market rates will again start to rise. The Federal Reserve’s interest rate cuts have kept inflation near an all-time record lows. But, the low inflation has been devastating to long term interest rates. Everyone has an opinion and a guess on when the Federal Reserve will once again begin to raise interest rates, but no one knows for certain. It is this uncertainty that keeps investors on their toes. Investors must remain diligent in order to find the highest money market rates and other interest rates on investments.