The revenge of the boring, low-risk cash account may be upon us.
When Federal Reserve policymakers meet on Tuesday, they are virtually certain to raise their benchmark short-term interest rate a quarter of a point, to 4%. It would be the 12th such increase since mid-2004.
That move should assure that rates on bank certificates of deposit and money market accounts will continue to rise as well.
Certainly, nobody's in danger of getting rich off single-digit bank yields. Still, this is the best that savers have had it in four years. And given the relatively poor returns on U.S. stocks and bonds this year, people who prefer to play it safe may be feeling a bit smug.
Despite a rousing stock rally Friday after the government's surprisingly strong report on third-quarter economic growth, the blue-chip Standard & Poor's 500 index is barely positive this year, up about 0.3% including dividends. The average U.S. stock mutual fund is up 1.3%, according to Morningstar Inc.
Long-term U.S. bond mutual funds are up 1% to 2% for the year, on average, including interest earnings and principal change.
Compared with those results, the 3.2% annualized yield on the average money market mutual fund sounds enticing. The 4.2% yield on six-month Treasury bills seems downright lush.
In the 1990s, investors were taught that cash was trash. Stocks were the place to be, and bonds were a fine idea too.
In this decade, the preferred investment has been real estate.
But as long as the Fed is tightening credit, stocks, bonds and real property all face a troubled outlook. The one beneficiary of the central bank's rate-raising campaign is cash.
Now, no respectable financial advisor would suggest that clients take this year's investment results as a reason to shift every last dollar into a money market fund or a T-bill.
Some make the case that this is a great time to be bargain hunting for stocks. Others say we're getting close to the point where investors will want to lock in long-term bond yields.
Even so, if the market trends this year have given investors a better appreciation of cash's role as a stabilizing force in a portfolio, that wouldn't be a bad thing.
Nor would it be so bad if people viewed rising short-term interest rates as an invitation to boost, or create, the emergency savings fund that every family should have (think hurricanes, earthquakes, sudden illness, etc.) but often defers because of spending needs or wants.
A cash account is the right place for emergency funds. Unlike with stocks, bonds and real estate, it's hard to lose principal when you're saving in a short-term account. Bank accounts are federally insured, Treasury bills are direct obligations of Uncle Sam, and money market mutual funds are nearly bulletproof as well.
There is evidence that Americans are getting the saving bug again: The total in bank savings certificates of $100,000 or less has jumped to $949 billion from $817 billion at the start of the year, according to data from the Federal Reserve Bank of St. Louis.
Fed policymakers must be happy to see this. They have warned about the potential perils of the nation's spendthrift ways. Consumer spending continued to be robust in the third quarter, the government's report Friday showed. But that was at the expense of saving: The official national savings rate was negative in the quarter, which meant that people spent more than they earned.
Americans didn't have much incentive to save in 2002 and 2003, when the Fed kept short-term interest rates at rock bottom. As the payoff improves, the excuse that "saving isn't worth it" loses legitimacy.
The big question, of course, is how much higher cash yields may rise from here.
Assuming the Fed lifts its benchmark rate to 4% on Tuesday, it would reach the lower level of the range in which most economists figure policymakers will stop -- somewhere between 4% and 5%. Within that range, it's believed, is the "neutral" rate: the point at which interest rates neither stimulate the economy nor hurt it, and at which inflation pressures will be sufficiently damped.
But the retirement of Fed Chairman Alan Greenspan on Jan. 31 complicates the outlook.
President Bush last week nominated Ben S. Bernanke, chairman of the White House's Council of Economic Advisors, to succeed Greenspan.
What constitutes a neutral rate in Greenspan's mind might not in Bernanke's. So wherever the Fed's rate is by the time Greenspan leaves (he will chair two more meetings after this week's, on Dec. 13 and Jan. 31), it's possible that the Fed under Bernanke could keep raising rates in 2006, could leave them unchanged or could begin cutting them.
The decision obviously won't be made in a vacuum. It will probably depend largely on the strength of the economy and whether inflation pressures from high energy costs filter into prices of other goods and services over the next few months.
