Friday, August 12, 2011

Fed's plan is no fix for economy, retirees

WASHINGTON — The Federal Reserve’s plan to keep interest rates super-low for at least two more years is great news for mortgage refinancers and other borrowers.

For retirees and others who need interest income? Not so great.

Nor will low rates likely revive a depressed home market, energize a weak economy or reassure frightened consumers.

No matter how low rates stay, nervous individuals and wary businesses remain reluctant to spend money or take risks. The economy is barely growing, unemployment is stuck at a recession-level 9.1 percent, the stock market is falling and the risks of another downturn appear to be rising.

“It’s all about consumer psychology right now,” said Stan Humphries, chief economist at “During economic turmoil, people hunker down.”

Low interest rates

Wall Street is still trying to assess the Fed’s unprecedented decision Tuesday to leave short-term rates near zero until mid-2013 because it thinks the economy will stay weak until then.

On Wednesday, the Dow Jones industrial average plunged about 520 points, one day after gyrating wildly and finishing up 4 percent after the Fed’s statement.

The Fed’s two-year timetable swept away any doubts about rates remaining low for the long run. Previously, it had said only that it would keep rates at record lows for “an extended period.”

“Any information that provides some certainty is good for the economy and good for people who are trying to think longer-term about investments,” said Frank Nothaft, chief economist at mortgage giant Freddie Mac.

The Fed sets a target for the federal funds rate. That’s the rate banks charge one another for overnight loans. The Fed has kept that rate near zero since the depths of the financial crisis in December 2008.

The funds rate indirectly affects rates for credit cards and some business loans.

Longer-term yields are determined by traders. These yields are also near record lows, driven down by investors seeking the safety of U.S. Treasurys.