The U.S. stock market jumped on news that a deal had been reached to avoid the fiscal cliff, though ultimately it may be more conservative investors who are the real beneficiaries.
Along with a 200+ point gain in the Dow Jones Industrial Average in the first hours after the deal was announced, there was also an immediate rise in bond yields. That move toward higher interest rates might be a hint of what's to come in the wake of the budget deal.
Stimulus trumps deficit reduction
While there are various winners and losers under the terms of the deal, the broad theme is that economic stimulus won out over deficit reduction. Originally, the fiscal cliff was designed to reduce the deficit through a combination of tax increases and spending cuts. However, as the date for enacting provisions of the fiscal cliff approached, it became apparent that the economy wasn't strong enough to withstand such a harsh dose of moves that would dampen both consumer and government spending.
Because of this concern over the economy, Congress decided to cancel most of the tax increases under the original fiscal cliff plan, and to at least delay the spending cuts. While this won't do anything to address the original goal of deficit reduction, it should allow the economy room to try to build some momentum. Part of the reasoning behind favoring stimulus over deficit reduction at this time is that the goal of deficit reduction would not be well served if the economy lapsed back into recession. That could reduce the tax base, and create new strains on the government budget.
Three reasons this could lead to higher savings account rates
Ever since the Great Recession, low interest rates have been one result of lingering economic weakness. Savers have suffered as a result, as bank rates fell to nearly zero. However, it's just possible that the budget deal could open to door to higher bank rates in 2013.
Here are three reasons why rates could rise as a result of the budget deal:
- Economic growth stimulates borrowing demand. As with most things, when demand rises, prices tend to go up; in the case of borrowing, those prices are interest rates.
- Stronger growth could eventually change Fed policy. The Federal Reserve has committed to keeping interest rates low until unemployment declines, and a stimulus-oriented budget deal could help reach that goal.
- A rising deficit could spur credit concerns. Unless the government can put a credible deficit reduction plan in place, doubts about the creditworthiness of the U.S. will bubble ever-closer to the surface. When lenders have credit concerns, they tend to demand higher interest rates.
Bond yields rose in early trading after the budget deal was announced. It may take more time for those higher interest rates to begin to affect savings accounts, but the budget deal might prove to have been the first step in that direction.