A money market rate describes the interest percentage set in actively traded markets rather than the predetermined rate of interest your bank pays on standard accounts. A money market deposit account at your bank earns a rate of interest that reflects current market trends, within boundaries defined by your bank's administrators. Some banks base money market account rates on current U.S. Treasury bill rates. Therefore, when you place your nest egg in a money market account, be prepared to ride the ups and downs of the financial market.
In the finance industry, bank depositors and loan applicants affect money market rates. Greater borrower demand may make banks willing to pay a premium for more depositor funds to lend. In addition, an upturn in the national economy often makes banks more likely to authorize loans than they would be during a recession, and to pay a higher rate of interest to depositors for the use of those funds.
From 2010 to 2011, money market deposit account rates hovered at a level just narrowly above standard savings account rates, with interest levels for money market accounts during the week of Feb. 8, 2010 averaging just 1.4 percent. As of March 23, 2011, the average rate of interest on money market bank accounts, taken from a sampling of 13, was approximately 1.6 percent.
However, low rates of return had been the norm for money market bank accounts even before the country's economic downturn late in the 2000s. The interest banks pay on their various consumer accounts ties directly into the Federal Funds Rate set by the Federal Reserve. From this rate, lenders determine their interest rates offered to borrowers, as well as the interest percentage paid to savings customers. From 2009 to 2010, the average bank prime loan rate set by the Federal Reserve was 3.5 percent, the lowest rate since 1957. The average prime rate for the decade 2001 to 2010 was 5.4 percent, as compared to 7.8 percent during the previous decade. When this figure begins to rebound, the average money market interest rate should respond accordingly.
Money Market Funds
A money market mutual fund is a different financial product than a money market bank account. Unlike a bank account, assets you place in a money market fund are not insured by the Federal Deposit Insurance Corporation (FDIC), and you cannot write checks to draw on the fund. Money market funds mature in a short period of time -- less than 13 months -- and offer a variable rate of return that is often higher than a money market bank account rate, due in part to the higher investment risk. When considering placing your nest egg into a money market fund, make sure that the associated fees will not cancel out your expected earnings. Also, only invest money that you will not need to access for the term of the investment.
- American Banker: Glossary
- Money-Rates; Six Factors that Will Affect Money Market Rates; Richard Barrington; 2010
- USA Bank Rates; Money Market Account Rates Feb. 8, 2010
- Money-Rates: Best Money Market Accounts
- Go Banking Rates; Money Market Interest Rates Cannot Stay Low Forever; Hank Coleman; January 2011
- Federal Reserve: Bank Prime Loan Interest Rate