Fed’s low rates: No fix for all

Associated Press

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, it’s a threat.

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

They’re also putting pressure on Americans’ pensions. The consulting firm Milliman Inc. said this week that 100 of the nation’s largest pension funds were $254 billion short of what they need to meet obligations to retirees July 31, up from a $186 billion shortfall at the end of June. Low interest rates were the main reason for the widening gap.

The sinking rates flow from the Fed’s federal funds rate, which the Fed has kept near zero since the depths of the financial crisis in December 2008. The funds rate is the rate banks charge each other for overnight loans. It 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.

The yield on the 10-year Treasury note, which influences long-term mortgage rates, set a record low of 2.03 percent after the Fed’s announcement Tuesday. Earlier in the day, the yield had been 2.34 percent. As recently as Friday, it was 2.56 percent.

The average rate on a 30-year fixed loan fell last week to a yearly low of 4.39 percent and likely dropped further this week after the Fed’s announcement.

Mortgage brokers say refinancers are rushing to lock in those rates.

Applications to refinance jumped nearly 22 percent last week from the week before, the Mortgage Bankers Association said. Refinancing made up more than 75 percent of mortgage applications, it said.

But tantalizing mortgage rates aren’t luring many buyers into a broken housing market. Even as refinancing soars, home purchase applications have barely budged.

Low rates are also squeezing retirees who typically keep most of their savings in safe but low-yielding certificates of deposit money-market accounts.