Could this be the year that interest rates on savings accounts finally reverse course and start rising? Recent economic signals are pointing in that direction.
The second estimate of fourth-quarter U.S. GDP not only confirmed the encouraging news of the first estimate, but it improved on it. Meanwhile, a less positive factor -- inflation -- also showed signs that it could start to push interest rates higher.
The U.S. Bureau of Economic Analysis released a revised estimate of fourth-quarter economic growth on February 29, and this measurement indicated a 3.0 percent annual, inflation-adjusted growth rate for that quarter. This was up from the original estimate of 2.8 percent. But more than the slight improvement, what was important about this second GDP reading was that it confirmed that growth had strengthened by the end of 2011. First estimates of GDP can be a little shaky, and then subsequent readings tend to get more accurate, so it can be a relief to see apparent good news confirmed.
This still doesn't mean that 2011 was a good year for the economy. The real GDP growth rate for the year is now estimated at just 1.7 percent, down from 3.0 percent in 2010. Still, the important thing at this point is that conditions began to improve later in the year, with a 1.8 percent growth rate in the third quarter, and a 3.0 percent growth rate in the fourth.
Of course, it would not be in keeping with the economic climate of recent years if all the news were positive, and right now a discouraging note is being sounded by oil prices.
According to the U.S. Energy Information Administration, oil prices were up by about 8 percent in February. If continued, this kind of rise in oil prices will begin to affect inflation in general. Petroleum is not only an important part of the economy in its own right, but it also tends to affect the prices of other goods and services.
Rising inflation could push interest rates higher, but this would be a false victory for savings account depositors. They might get higher interest rates, but at the expense of seeing the value of interest and principal eroded by inflation.
Influence on the Fed
Growth is a positive sign for the economy, and inflation a negative one, but what they have in common is that they are both closely watched by the Federal Reserve. By focusing all of its efforts on promoting growth, the Fed has been willing to take its hands off the wheel when it comes to inflation. If inflation shows signs of becoming troublesome, the Fed might have to ease its extraordinary commitment to low interest rates, and it would be especially willing to do so if growth were progressing. This could lead to higher savings account rates. The trick would be to get there without too much inflation, which would mark a long-awaited win for savings account depositors.