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Why the Best Money Market Rates Are So Pathetic

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Finding the best money market rates available for your savings can help you earn a lot more interest than settling for whatever your local bank pays you. But lately, even the best rates have left savers feeling shortchanged. What's holding money market rates back?

How low can they go?
Before the financial crisis, savers could expect decent returns on their cash. Money market rates of 3%, 4%, or even 5% were available to those who were willing to do a little digging.

But those 5% rates are long gone, and nowadays, you may struggle even to get to 0.5%. Currently, a few banks, including American Express (NYSE: AXP  ) and Capital One (NYSE: COF  ) , offer between 0.75% and 1%, and a few special limited offers from smaller banks can get you above the 1% mark in some limited circumstances.

Unfortunately, among most big national banks, the news is far worse. Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) have rates of less than 0.1% on their money market accounts. Minneapolis-based regional powerhouse US Bancorp (NYSE: USB  ) offers similarly low money market rates.

Where'd the income go?
The big problem for savers has come from the Federal Reserve, which maintains a firm grip on short-term interest rates. In order to try to help the U.S. economy to come out of recession, the Fed started lowering its Federal Funds rate in late 2007, taking the rate from 5.25% as of August 2007 to a range of 0% to 0.25% by December 2008. That big drop has pulled even the best money market rates down with it. Moreover, since 2008, the slow pace of recovery has led the Fed to keep interest rates right where they are, and at least for now, there's no relief in sight for savers. Many experts now expect the Fed to keep rates low throughout 2014 and into 2015.

For banks, those low rates have been extremely lucrative. On one hand, B of A, Wells, and US Bancorp have been able to retain money market deposits at next to no interest cost, helping provide valuable cash to turn around and lend at higher rates. Moreover, the increased mortgage refinancing activity that low rates have spurred has boosted their bottom lines as well. Even for AmEx and Capital One, which have been willing to pay a bit more to attract savings to their online banking operations, being able to pay less than 1% to savers allows them to keep their margins high.

What you can do
Unfortunately, the options savers have in the current environment are limited. Many people seeking more income have taken money out of savings and bought higher-yielding dividend stocks, but by doing so, they've gone from a risk-free federally insured guarantee of getting their principal back to a much riskier investment that can produce substantial losses.

Digging for the best money market rates among banks hasn't been nearly as lucrative as it once was. As long as the economy maintains its sluggish pace of recovery, money market accounts aren't likely to start paying you much more in interest anytime in the near future.

Savers may not like its rates, but Bank of America's stock doubled in 2012. Are there more gains yet to come? Find out whether B of A's stock is a smart buy by reading The Motley Fool's premium research report on the big bank, in which our top analysts break down the bank's investment prospects. Click here now to claim your copy.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2013, at 12:43 PM, StopPrintinMoney wrote:

    Thank Benny Bernanke for these rates.

  • Report this Comment On April 09, 2013, at 1:16 PM, thunderboltnova wrote:

    You're forced into the stock market. No longer is there a 40/60% allocation, it's all stocks baby!

  • Report this Comment On April 22, 2013, at 4:20 PM, Jon0617 wrote:

    Here I thought it was either lack of understanding, or having too little cash to open one of the big premium accounts, that was turning up such low rates of return as I was digging for decent places to park cash.

    At this point I'm seriously considering just using my ShareBuilder FDIC insured cash balance sweep account, with its 0.50% APY, for savings. At least in the short term.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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