Savings Rates Fall Sharply After Fed Cut

Rates on money market funds and certificates of deposit continued their recent slide last week in response to the Federal Reserve’s Jan. 3 move to lower interest rates, according to two interest-rate tracking firms.

Savings rates are likely to erode even further in coming weeks, analysts said, meaning investors looking to lock in yields on certificates of deposit might need to act quickly.

“The market is still digesting the Fed’s last cut,� said Peter Crane, editor of IMoneyNet Inc., which compiles data on interest rates. “We expect that rates will drop a little more next week, and again in the following week. We think we’ve got another quarter percentage point [decline] to go.�

Nationally, the average seven-day compound yield on money funds fell to 5.96% on Wednesday, down from 6.14% two weeks ago. The average annualized yield on a six-month CD slid from 5.42% to 5.23% over the same period.

Crane believes these rates ultimately will fall a half of a percentage point, equaling the size of the Fed’s rate cut.

Moreover, many market experts believe the Fed might cut interest rates again in coming months, which could put money rates into a long downward spiral.

“This is just a continuation of the trend that started several months back when it became evident that the Fed would need to cut interest rates to help the economy,� said Greg McBride, financial analyst with BankRate.com, which also surveys interest rates. “They are likely to cut rates again, maybe several times, in the first half of this year.�

In the midst of this sharp decline, money-fund assets took their biggest jump in history, gaining $88.16 billion to $1.89 trillion during the week ended Saturday, Crane noted. That’s more than twice the inflow of the second-best month for money-fund inflows and about equivalent to the average inflow in a typical month.

The rush into money funds reflected an opportunistic shift by institutional investors, Crane said. They pulled money out of Treasury bills and commercial paper, whose rates fell in lock-step with the Fed cut, and put it into money market mutual funds where rate changes tend to lag. That will allow these big companies, which need to keep deposits safe and liquid, to earn a better return on their cash for the next month, whereas money fund yields catch up to the decline in market interest rates.

For individual investors, there remain some opportunities, McBride adds. While average rates are certainly down and declining, some financial institutions--particularly those that primarily compete via interest rates advertised over the Internet--continue to offer higher-than-market rates as a way of attracting new customers.

Both IMoneyNet and BankRate offer free rate shopping on their Web sites at https://www.imoneynet.com and https://www.bankrate.com.

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The Fed’s Effect

Yields on bank CDs and money market mutual funds have tumbled in the last week in the wake of the Federal Reserve’s surprise half-point cut in its benchmark short-term interest rate. National average yields for three savings vehicles:

Yields used are seven-day compound yields for money funds and annualized percentage yields on CDs.

Source: IMoneyNet.com