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The end of Labor Day also marks the end of the lazy days of summer. If you’ve been getting away and not paying attention to the financial world over the last two months - we envy you. To make your re-immersion into reality a bit easier, we’ve put together a BestCashCow recap of what’s happened in the financial world over the summer.

Overall, bank rates have risen since the beginning of July. On July 1, the top savings rate was the Everbank 3 month offer at 4.01% APY. The second best offer was SmartyPig at 3.90% APY and the average of the best top 10 rates was 3.32% APY. 

Today, the best savings account or money market rate is still Everbank’s but that 3 month offer has climbed to 4.76% APY. The second highest rate is AmTrust Direct at 4% APY and the average of the top 10 best rates is 3.56% APY. 

The same trend is true for CDs. On July 1, the highest rate on a 1-year CD was Indymac at 4.35% APY and second was Wachovia at 4.25 % APY. Today, the highest rate on a 1-year CD is Corus Bank at 4.75% APY and Washington Mutual at 4.50% APY. 

Savings rates have climbed by 24 basis points (.24 percentage points) even as the Fed has kept the Federal Funds Rate at 2%.

Why? Sam Cass provides on explanation in an article that explains the impact of the credit crisis on deposits and the interest rate you will receive. 

Indeed, over the summer, we’ve seen banks become increasingly aggressive in seeking deposit dollars. This is especially true of banks that have suffered steep mortgage-related losses. Indymac, Countrywide, WaMu, and Wachovia all have aggressive rates as they seek your deposit dollars to repair their balance sheets, stay solvent, and regrow their lending businesses.

Speaking of Indymac, we can’t forget that this summer saw the second largest banking failure in US history as Indymac was taken over by the FDIC in early July. While the failure was a tragedy to stock-holders, employees, etc, depositors who stayed within the FDIC limits were okay. The FDIC moved in quickly and made sure that depositors had access to their money. In many cases, depositors were able to get money back in excess of the FDIC limit (The FDIC covered 50% of all money above the FDIC limits).

Today, Indymac has reconstituted itself as a Federal Bank under the FDIC’s aegis and is offering competitive rates on CDs and money markets. One has to wonder if there is a safer bank in the country than one run by the FDIC?

Fed Funds Rate Steady at 2%, For Now

As we mentioned, the Fed Funds rate stayed steady at 2%.  Despite a major bank failure (Indymac), the near failure of Fannie Mae and Freddie Mac, a slowing economy, falling home prices, rising unemployment, and hundreds of billions of dollars in bank write-offs, the Fed will not drop rates further but will instead raise them at some future point.  Why? Inflation. Core and non-core inflation rose significantly over the last couple of months as the high price of oil, food, and other materials began to show up in the government’s CPI calculations. We’ve been making the case for quite some time that inflation was a problem. Almost any consumer that shops, sends their kids to college, heats their home, buys food, etc. can tell that inflation has been increasing for some time. In July, wholesale inflation increased by 1.2%,  and consumer prices rose 5.6% from the year earlier. Both of these jumps were the largest in 17 years. Prices should moderate in August with the drop in oil prices but the Fed is increasingly vigilant about inflation and will eventually raise, not drop rates.

Auction Rate Securities Slowly Getting Redeemed

Over the summer, under fire from the Attorney Generals of several states, the big brokerages finally caved and offered to redeem the cash their investors held in auction rate securities. Starting at the end of July, the big banks – UBS, Citi, Merrill Lynch – announced a plan to redeem their investors. Despite this movement from the big banks, only $90 billion of the estimated $210 billion outstanding in auction rate securities has been redeemed. Many investors will have their money locked away in preferred offerings or SLARS, Student Loan Auction Rate Securities.

Housing Market Still Declining

The housing market continued to tumble throughout the summer, a period that is traditionally relatively strong for real estate. Sales were down, prices were down, and inventory was up.   Buyers, even those with good credit, are increasingly finding it difficult to get a mortgage, and the problems at Fannie Mae and Freddie Mac, two large, quasi-governmental institutions will not help the problem. While housing sales did edge up in August from an enemic July, prices dropped. The data seems to indicate the housing will have to drop further to entice buyers into the market and make homes affordable enough.

Oil and Gas Went Through the Roof

Oil prices went through the roof over the summer, briefly touching a record of $140+ per barrel. Gasoline costs rose to over $4.00, making it cost over $100 for some people to fill their tank. The high price spurred a backlash and miles driven by Americans dropped from the previous year for the first time in 20 years. As the high price of oil caused drops of consumption, prices came plummeting down. Still, with oil in the $120 range, it’s much more expensive than it was a year ago when it was trading in the $60-70 range.

There’s probably more we could recap. As many of you who have traveled abroad came to realize, the dollar is sick. A friend of mine went to Norway and spent $70 for dinner at McDonald’s with his wife. The dollar has staged a bit of a rally lately but many question whether it can last. 

That question as well as a host of others will play out over the next several months. We’re excited it’s September look forward to continuing to provide you with the best rates, the best information and analysis on economic factors that influence rates, and other general financial and economic news.