Summer Ends On A Chilly Note For Savers

The last week of August brought yet another confirmation that the U.S. economy is growing slowly, and a widely followed speech from Ben Bernanke that offered no new answers to the economic doldrums. Neither development was good news for savers.

Given how low savings account rates are, the question is no longer whether they will continue to fall, but how long they will remain at today's artificially low level. Based on the above two late-summer developments, those low savings account rates seem likely to stick around for quite a while.

GDP stuck in low gear

On August 29, the Bureau of Economic Analysis released its second estimate of U.S. Gross Domestic Product for the second quarter of 2012. After inflation, the economy is now thought to have grown at a 1.7 percent rate in the second quarter. That's a slight improvement from the 1.5 percent that had originally been estimated, but still represents a deceleration from the 2.0 percent growth rate of the first quarter, and especially from the 4.1 percent growth rate at the end of last year.

The slow economy is the central cause of the extreme low rate environment for savings accounts, money market accounts and other deposits. For one thing, low demand for capital gives banks little incentive to offer higher rates to attract deposits. For another thing, the Federal Reserve has acted aggressively to drive interest rates down, as Fed Chairman Ben Bernanke reiterated in his August 31 speech.

The Fed remains committed to low interest rates

Speaking at a Federal Reserve symposium in Jackson Hole, Wyoming, Bernanke recapped the actions the Fed has taken to drive both short- and long-term interest rates down. Normally, the Fed would address a slowing economy by lowering short-term interest rates, which was the first thing the Fed did in response to the Great Recession. However, given the severity of that recession, the Fed then took the more unusual step of buying bonds to pull long-term rates down.