Money market rates, usually the bottom of the barrel as far as paid interest is concerned, are closing in on and in some cases exceeding the rates paid for certificates of deposit.
It’s an unusual turn of events, particularly since the Federal Reserve spent the first half of the year cutting interest rates in an effort to keep the economic engine chugging forward.
But with investors weary of the stock market roller coaster and in search of a secure, relatively liquid place to park their cash, banks have been bumping up money market fund rates, even if it means lower margins.
And local consumers eager to get the best of both worlds have wasted no time taking banks up on their offers.
“There’s been a huge shift of people going to these high-end liquid products,” said Lori Jamsky, vice president, deposit operations at Informa Research Services Inc., a Calabasas-based financial market research firm.
Added Joe Morford, an analyst with Dain Rauscher Wessels: “There’s money on the sidelines in cash and (investors) want a little better yield. Banks are offering competitive rates to attract the business.”
Sweetening the money market pot traditionally has been a way for financial institutions to snag customers from the competition. Lure them in the door with a liquid, high-interest account and then cross-sell additional products to make up for the cost of paying out the higher interest.
When declining interest rates meet an environment in which banks are competing fiercely with one another for customers, most financial institutions particularly the smaller ones are on the lookout for ways to grab a little extra market share.
“In the interest rate environment we’re in today, money market accounts are worth more to us because the balances tend to stay longer,” said Dennis Shirley, executive vice president, retail marketing at Sanwa Bank California.
Money market accounts are considered “sticky,” that is depositors are less likely to pull out if there are rate changes than they are with CDs.
But don’t expect the great deals to stick around forever.
Heng Chen, executive vice president, asset liability/financial analysis at City National Bank, shrugged off unusually high money market rates as “promotional.”
And D. Linn Wiley, chief executive of Citizens Business Bank, said that besides attracting customers, there is no “logical” reason for banks to pay more interest on a money market account than a CD.
While the liquidity of money market accounts makes it easy for investors to adjust their strategies, banks also have that luxury. “It gives them more flexibility to offer higher rates but at the same time protects them,” said Jamsky. “They could change their rates tomorrow.”
So if the Fed decides to quit cutting rates in an effort to keep the economy stimulated, banks will do the same and interest paid on CDs will once again outpace those of money markets.
When will banks once again demand a greater commitment from depositors in order to earn high interest? “It depends on the economy,” said Morford.
