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A second look at money market accounts.

Remember money market accounts? Those deposit accounts that were far sexier than passbook savings accounts , paid decent interest rates, and were even bundled with checkbooks and sometimes even credit cards? They are still around, and some are even making a little money, albeit at far lower rates than in their heyday of the late 1980s (but then again, even passbook savings accounts paid interest rates higher than 8% during those times).

A money market account might not outperform the S&P 500 these days, but there has been a slight rebound in the second quarter. Money market accounts are definitely outperforming their cousins: interest rates on savings accounts have dwindled down over the last three straight quarters. A typical money market account these days will not require a minimum balance to earn a promised rate of return.

The reason why most banks aren’t offering great rates on money market accounts is that the intervention from the United States Federal Reserve is keeping money rates lower than usual in order to stimulate the economy, or at least to prevent a macroeconomic catastrophe. Since the Federal Reserve is expected to continue this monetary policy for a while, the interest rates offered by banks on money market accounts will probably remain at around 1% or less. There are, however, two factors which could drive money market rates up again. One is inflation, which it is being kept in check by the Fed (but for how long?). The other would be a failure on the part of the US government to make payments on its public debt.

Perhaps a few months ago both scenarios described above were unlikely, but lately they have become plausible. The Consumer Price Index, an economic yardstick used to measure inflation, has shown an upward trend that is expected to hit 4.9 percent at the end of 2011. Then there’s the very serious issue of the grim outlook of the US deficit and the prospect of default. In both situations the interest rates would be expected to soar, whether to rapidly catch up with the rates of inflation or due to the global economic fallout caused by US default. Money market rates tend to adjust very quickly, so it makes sense to be prepared with a money market account.