How the President-Elect Can Affect Money Market Accounts
The President-Elect and the Federal Reserve
The Federal Reserve (commonly referred to as the “Fed”) is the central bank of the US government. Its objective is to maintain the general stability of the American economy and it has the power to define certain economic policies for this purpose. Within the Fed is a group called the Federal Open Market Committee (FOMC) – these are the policymakers. The FOMC is made up of 12 members:
- Seven members of the Federal Reserve Board of Governors
- President of the Federal Reserve Bank of New York
- Four of the remaining 11 Reserve Bank presidents (for one-year terms on a rotating basis)
The council meets eight times a year. One of their jobs is to decide if there should be any changes to the federal funds rate — that’s the interest rate banks charge when they lend money to each other.
When the economy heads into recession, this committee lowers the federal funds rate. This allows banks to borrow money cheaper and can help keep the economy moving when things are slowing down. When the economy grows too quickly, the FOMC raises the federal funds rate to keep that growth in check.
A president-elect can hope that the interest rate will rise or fall, but he does not have the power to demand changes. The Federal Reserve (commonly referred to as the “Fed”) determines rate changes. That’s not to say that a president-elect has no role in setting the federal funds rate. The FOMC tries to predict the actions of each new president and changes the federal funds rate accordingly. Their objective is to predict whether proposed policies are likely to lead to economic growth.
However, the potential actions of a president-elect are only a small factor in the FOMC decision-making process. The determining influence is the impact of a rate change on the economy, depending on everything that is happening in the United States and around the world.
How Changes in the Federal Funds Rate Can Affect Money Market Accounts
Banks use the federal funds rate as a benchmark to decide rates for deposit accounts, loans, etc. When the federal funds rate rises, bank rates also rise: savings accounts earn more interest and loans charge more interest. When the fed funds rate goes down, bank rates go down.
An attractive feature of a money market account is that you lock in the interest rate when you open an account. So even if the Fed cuts its rate and the prime rate follows, you get the same earnings for the entire term.
How are the interest rates for money market accounts determined?
When your bank decides interest rates for money market accounts (or other interest-bearing products), it decides how much above the federal funds rate it is willing to pay depositors. Let’s say the federal funds rate is 0.25%. If your bank offers 0.50% interest on a money market account, that means you’re getting 0.25% more than the federal funds rate.
Interest rates quoted on money market accounts vary from one financial institution to another, as each sets its own rate based on the federal funds rate.
What to consider if you are looking for a money market account
If you are looking for a money market account, there are a few things you need to pay attention to. Some of them include:
- APY: This determines how much money you earn in your money market account. Look for the highest rate you can find.
- Access to your money: Every money market account is different. Some offer easier access to funds than others. Find out if an account allows you to transfer money online and if you can withdraw funds at an ATM. If you plan to use your money market account as an emergency savings account, having 24/7 access is essential. While you’re at it, make sure the bank allows you a sufficient daily withdrawal limit to cover most emergencies.
- Account limits: All money market accounts are subject to federal transaction limits, regardless of which financial institution you are dealing with. Once you exceed the transaction threshold, you will be charged a fee. It helps to have a clear understanding of the number of trades available to you. For example, you might be able to withdraw funds from an ATM or bank teller if you have a limit on the number of checks you can write per month.
The bottom line
Money market accounts can be an attractive place to keep money. They typically offer interest rates above savings, check and debit card writing privileges, and FDIC insurance. They’re not for everyone, however. Here are two issues that can be considered disadvantages:
- High minimum deposit: Generally, money market accounts require a higher minimum balance than savings accounts. The highest interest rates are paid on accounts with large deposits, often in the four or five figure range.
- Higher rates may be available: Regardless of what the Fed does next, you may be able to get a bigger return with a Certificate of Deposit or High Yield Savings Account. It pays to check out all your options.
Ultimately, Federal Reserve rate decisions determine whether we can afford to buy a house, use credit cards, or take out a personal loan to remodel the kitchen. It is also the Fed rate that sets the basis for what we earn on deposits, including money market accounts.
If you want to know what is likely to happen to interest rates in the near future, it’s as simple as paying attention to what the Fed will do next.