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Published: Wednesday, 8/25/2010

Interest rates likely to stay low as jobs remain scarce


CHICAGO - Bad news for savers: The national average rate on checking, savings, and other deposit accounts has dipped below the 1 percent mark for the first time in at least 10 years - and doesn't appear headed higher anytime soon, according to an analysis by Market Rates Insight.

Not surprisingly, the woeful state of the economy is the culprit: A "strong and significant negative relationship" between unemployment and the interest rates paid on consumers' deposits has reared its ugly head, Market Rates said.

The study found that 65 percent of the swing since 2001 in deposit interest rates, also linked to money-market and certificate-of-deposit accounts, is tied to the ebb and flow in the nation's jobless rate, which stood at 9.5 percent in July.

"Clearly the unemployment rate is a major factor in deposit rates," said Dan Geller, executive vice president at MRI and author of the study.

The gap between the national average of deposit rates and unemployment has widened considerably since the middle of 2007. The national average interest rates fell to 0.99 percent in July.

As a barometer of economic activity, the unemployment rate typically reflects credit and lending activities. In this recession, the relationship is marked by the tightened state of credit markets.

There are other factors that feed into low interest rates on deposits - most notably, the federal funds rate, which was 0.18 percent in July. The annual inflation rate, which was 1.24 percent last month, fuels the prevailing level of interest rates as well.

"Historically, the Fed did not increase the funds rate during high unemployment periods," Mr. Geller said.

"When we see the unemployment rate start to decline, it will be a sign that interest rates on deposits are about to go up."

Earlier this month, he predicted that interest rates on deposits would continue to fall as banks look for ways to make up for the loss of fee income as a result of new regulations on electronic fund transfers.

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