What are Money Market Interest Rates Based on?

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  • Written By: N.M. Shanley
  • Edited By: Michelle Arevalo
  • Last Modified Date: 06 May 2020
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Money market interest rates are based on how much interest a bank or credit union can pay out to its customers and still make an overall profit. As a result, these interest rates are affected by the fees charged to customers, and how much money these financial institutions make on their loans and corporate investments. The overall health of the economy also affects these rates. The financial institution must pay costs such as office overhead, employee salaries and stockholder dividends before it can determine money market interest rates.

Banks and credit unions pay interest on savings account balances, and earn money from customer fees and interest on loans and investments. The difference between how much is paid out and how much is earned is called the spread. This spread helps determine what money market interest rate each financial institution can pay out and still make money. A larger spread usually means more money is available to pay savings account interest to customers.

Banks and credit unions make money when customers take out loans and pay interest. The higher the loan interest, the more funds are available to pay out interest on savings accounts like money market accounts. Generally, part of the interest earned on loans is paid back out to customers with savings accounts such as money market accounts.

Part of the money a bank or credit union pays out as money market interest rates also comes from interest earned on the financial institution's own investments. These can include deposit accounts at other financial institutions as well as investments in the stock market, such as mutual funds. The more money a financial institution can make on its own investments, the more money it will have available to pay out as money market interest.

The overall health of the local and international economies will affect a financial institution's investments. As a result, the money market interest rates that can be offered will, in turn, be affected by the overall economy. When a bank or credit union loses money on its investments, money market interest rates may be lowered.

Expenses must be paid before a financial institution can determine money market interest rates. After a bank or credit union determines how much income it has and covers all its expenses, such as overhead costs, employee salaries, and stockholder dividends, it can determine how much money is left to pay its money market interest rates. Therefore, a financial institution with lower overhead costs may be able to pay higher money market interest rates.

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