The Tightening. It sounds like a the title of a Sam Rami horror movie. In fact "The Tightening" is what Al Greenspan is doing now. The Fed Funds overnight rate has gone from 1% to 2.75% over the last year. This has pushed the rates on online savings accounts at places like INGDirect and EmigrantDirect up as well. How long will the tightening go on and how high will rates go?

The latest issue of Barrons notes that Futures traders are pricing in about a 3.75%-4% Fed Funds Rate by year end.

Some of the folks quoted think the tightening could continue on into 2006. The always informative Stephen Roach over at Morgan Stanley notes that to get any kind of normal real (inflation adjusted) interest rate short rates may have to be pushed over 5% (though it's not clear that Greenspan would do this - he may prefer to continue his slo-mo devaluation of the dollar).

What does this all mean to the small saver (me and I presume you dear reader)? It means that ING/Emigrant savings accounts will be yielding over 4% by Dec 2005. It means that CDs may not be such a good deal right now - it may pay to wait and let yields be pushed higher. It also means that income producing investments like REITs (many of which yield 5% or so) may come under pressure as cash becomes a reasonable alternative. (Oh, and it also means that if you owe any variable rate debt that the payments here will step up as well).

-fg

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