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Fed plans to keep interest rates low; Good for refinancers; bad for economy and retirees

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.

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. 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 sets a target for the federal funds rate. That's the rate banks charge each other 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. 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.

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 acted.

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. Potential buyers have plenty of reason to stay on the sidelines. Many can't buy because the home they live in is worth less than the mortgage they owe on it

Since peaking in 2006, prices across the country have plunged nearly 24 percent to a median $169,200. They're down 4 percent since the Great Recession officially ended more than two years ago.

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

Top-yielding 1-year CDs are paying an average of just 1.2 percent. Longer-term 5-year certificates are topping out at 2.4 percent. Inflation is running at an annual rate of about 3.6 percent, so these instruments won't even keep up with the cost of living.

The Fed might have made it impossible for many retirees to rely just on interest-bearing accounts.

"The Fed's pledge illustrates the peril of being 100 percent conservative in your investments," says Greg McBride, a senior financial analyst at Bankrate.com. "Your entire income stream is hitched to the Fed's wagon, and it won't be moving for two years."

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