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Online Savings & Money Market Account Rates 2021

Online Savings & Money Market Account Rates

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Federal Reserve Has No Plans to Raise Interest Rates Any Time Soon

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The Federal Reserve has left the Fed Funds rate at zero to 0.25%, and projected no plans to raise interest rates through 2022.   The good news is that it is still not considering negative interest rates in the US.

It is projecting a 6.50% decline in US GDP in 2020.

The Fed sees inflation well below its 2% objective and it sees unemployment at extraordinarily high levels so there is no pressure whatsoever to raise rates.   Meanwhile, it remains committed to using all sorts of tools involving its lending programs in order to avoid a collapse in the economy.

Against, this backdrop, it is very difficult to say that cash is exciting.   It is safe, it is stable, and it is still going to be trading at face value plus interest if the market loses half of its value as this Coronavirus-induced economic crisis continues.   But, compared with the performance of the stock market over the last several months, it is hard to make a compelling case for cash and holding large amounts of it carries the risk of a devaluation of your purchasing power.   I suggested recently that folks might want to resist the temptation to go completely into cash, even as the economy deteriorates.

There is another temptation that I also suggest that folks resist and that is the temptation to give up on cash and accept zero returns.   All major online banks are still offering yields of over 1%, and 1% is better than zero, especially when you factor in the value of compounding interest rates over time.   We received notes from lots of folks who were excited about earning 2.50% instead of 2% this time last year, and while savings and money market accounts feel like trash now, it is just as important in this environment that your cash resources are earning as much they can.   You can compare online savings rates here and you should also continue to check local savings rates where you live, here.

Savings alternatives that may preserve the value of your cash while giving you access to something else of value, instead of interest, could be particularly interesting to those whose primary goal is to preserve capital.   Bask Bank is offering an account that pays interest in the form of American Airlines AAdvantage miles at 1 point per dollar on deposit per year.   Bask Bank also offers bonuses that could total as much as 42,000 American AAdvantage points if you maintain a balance over $100,000 for over a year.   Since these bonus are due to expire at the end of June, I think that this is a good time for anyone planning to travel again in the future to look at accumulating miles through this program.   Learn more about Bask Bank's offer here.

While this remains a difficult time for savers, I’d encourage folks to look at remortgaging and home equity options, if they are at all inclined.

Savings Accounts May or May Not Be the Best Place to Be Right Now

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Following the stock market’s incredible collapse in March and subsequent recovery, my inbox has been inundated with emails from readers writing to tell me that they are now 90% to even 100% in cash.

These emails come from people young and old, rich and poor, optimistic in their tone and pessimistic in tone.   Some include racist, conspiratorial rants as part of their justification.   Others are more rational.

I am not 100% in cash or even close.   I maintain a healthy portfolio of major pharmaceutical stocks and biotechs.   I own major technology stocks that I have no intention of selling.   But, outside of those sectors, my only exposure to equities is through Berkshire Hathaway.

Stock markets today are dramatically overvalued.   The S&P is trading at a trailing P/E of 20x.   While trailing earnings or even current earnings are not the only way to value a stock or an index, the other mechanisms take into account earnings growth and leverage.   Earnings will be down dramatically across the board in 2020 and probably into 2021, and the market is highly leveraged.   Therefore, there simply is no more favorable metric than the P/E ratio right now.

The problem with savings and money market accounts as a place to hang out is clear.   The longer that the Federal Reserve maintains the target Fed funds rate at zero to 0.25% (or lower), the more likely we are to see savings rates fall.   Over the last two weeks, virtually every major online bank lowered its savings rates by 20 basis points and it is increasingly difficult to get more than 1.30% on your savings.

Some have suggested that the outcome of the COVID-19 crisis will be a prolonged period of deflation in the US.   If we do enter a period of deflation, cash could be the single best asset to hold since it will maintain its real value ($1 tomorrow will be worth more than $1 today and commercial banking will never take your money and give you back less).

I personally do not see asset deflation in an era where the Federal government will be unable to have a balanced budget and where leverage rates are likely to need to remain very high throughout the public and private sectors.

In an environment where prices are increasing by more than what you are earning in a savings account, maintaining your money in savings accounts may not be a reliable intermediate or long-term strategy for maintaining value and purchasing power.

Savings accounts are calming and are a great place to hang out for short periods of time when the economy is going through a massive transformation.  The ability to earn a higher rate of return and maintain complete liquidity makes online savings accounts particularly interesting during this period.    But, people need to think a little more creatively about maintaining the real value of their money and that may involve investing in commodities such as gold, real estate, some equities and short or long term CDs.

Federal Reserve Maintains Fed Funds Rate at 0 to 0.25% and Outlines Further COVID-19 Action

The Federal Reserve has held the Fed Funds target rate constant at zero to 25 basis points today.   Chair Jerome Powell indicated that the ongoing COVID-19 public health crisis has weighed heavily on the economic condition of the country.   Inflation remains an overriding concern to extraordinarily low interest rates, but is very muted as a result of the economic slowdown and does not present a concern.  The Federal Reserve also indicated that it remains prepared to use tremendous tools in the interim as it sees fit in order to maintain liquidity, including using its balance sheet to purchase treasury and agency mortgage-back securities.   It is also employing lending powers to an unprecedented extent through a “mainstreet facility” to make credit available where such credit may be necessary to avoid or reduce household suffering (with the understanding that the Federal Reserve has lending powers but may not make grants or extend loans that it does not expect to see repaid). 

The Fed’s statement indicates an intention to maintain rates here until it is confident that the economy has weathered COVID-19.   The statement does not introduce the possibility of a move into a negative Fed Funds rate as was advocated last week by Narayana Kocherlochota, the former Chair of the Minneapolis Fed.   Importantly, the Fed’s statement does not commit to maintaining low interest rates until unemployment returns to 2019 levels.

The Fed refrained from stating that it believes that the economy will recover nicely in 2021 after COVID-19 is behind us.   Powell recognizes that there is uncertainty around the virus and that the virus is going to dictate the length and depth of this depression.  We will obviously see significant declines in economic activity and significant increases in unemployment in the near term, but POwell and the Fed are unable to provide guidance for the intermediate and longer term.