Smart Retirement Savings

Money Market Account Yield Outlook for 2007

Since mid 2006, I have been content with the 5% annual return by parking my cash in high yield money market accounts. Will this savers' party end soon?

Most economists expect the Federal Reserve to start trimming its target for short-term interest rates -- after a series of 17 increases since mid-2004 -- as part of its effort to engineer an economic "soft landing."

Money-fund yields, which move in tandem, would thus fall. And the unusual current situation of yields on money funds and other short-term instruments topping those of bonds "won't last forever," says Mary Miller, director of the fixed-income division at investment manager T. Rowe Price Group in Baltimore.

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Of course, the consensus economic prediction could be wrong. If the economy falls into a recession or inflation surges, the rate outlook changes dramatically.

One of the most pessimistic forecasters in the survey, James Smith, of Western Carolina University and Parsec Financial Management in Asheville, N.C., is expecting two quarters of negative economic growth -- the textbook definition of a recession.

Dr. Smith predicts the Fed will lower its rate sharply, to 2.5% by Dec. 31. He sees both short- and long-term yields falling, with 3-month Treasurys at 2.48% on Dec. 31 and 10-year Treasurys at 4.14%.

While few other economists expect a recession, investors who are of that view might want to shift dollars from money funds to longer-term bonds, which would go up in price as rates fall.

Conversely, Gail Fosler, chief economist at the Conference Board, known for its consumer confidence index, is predicting an uptick in inflation. Ms. Fosler is looking for the Fed to raise its rate to 6.25% by Dec. 31, and sees 10-year Treasurys ending 2007 at 5.25%.

In that case, investors would do better in money funds than in bonds, which would fall in price.