Monday, May 31, 2010

Time for interest rates to rise?

You have probably noticed the interest rates on your bank accounts drop below 1%. They are probably closer to 0.25%, and have been for a long time. Want to make more money by buying a CD? If you are very lucky, that will push you over 1%. If you for some reason bought a long-term CD, you might even get 2%.

Though some would readily debate this, it looks like the recession is coming to an end. A couple of days ago, U.S.A. Today reported that travel spending over Memorial Day weekend has finally risen. Entertainment venues such as Six Flags are finally seeing profits on the rise. This means one thing: People are spending money again. I can't decide whether this is a good thing; we certainly don't need individual debt levels to rise. However, it means unemployment will soon be dropping. The past  year and a half on Wall Street saw significant gains.

Interest rates can only rise when the economy is strong. Whether the economy can yet be classified as "strong" is still a matter of debate. However, inflation is on the rise, and the fastest way to check inflation is to raise the interest rates. I obviously cannot speak for the federal reserve committee, but it seems the time to raise the rates is coming soon.

What does this mean for your finances? If you have short-term investments coming due and plan to re-invest your money, or you are considering moving money to a CD or money market account, consider putting it in funds with a maturity date of 18 months or less. Though the interest will be nominal, it will position you to reinvest at a higher rate in 6 - 18 months. Yes, the short term gains are small, but if you are lucky it will help in the long run.