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Low rates help, hurt as economy recovers

Federal Reserve Chairman Ben Bernanke

Federal Reserve Chairman Ben Bernanke. Photo: NY Daily News

The Federal Reserve last week told the world it’s in a long-term relationship with ultra-low interest rates. In the process it laid the groundwork for a lot of good stories.

The Fed: “The committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent …  low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Translation: Interest rates, which are already at or near record lows, are going to stay that way probably until you start making plans to party like it’s about to be 2015.

For journalists on the business beat, that’s a cue to investigate such stories as whether readers are rushing to refinance their mortgages or waiting to see just how low rates can go. Nationally, mortgage refinance activity has been on the rise, according to the Mortgage Bankers Association. Mortgage refinancing now accounts for about 80% of mortgage activity these days.

“Ask economists how much lower they think mortgage rates will go,” said Martin Crutsinger, a reporter who has been covering the Fed for the Associated Press since the early 1980s.

Then look for people like Mark and Jan Sass and Gloria Putnam who are refinancing their loans in hopes of mortgage-free retirements. Take a tip from the Tampa Bay Times’ Mark Puente and ask if business is booming for mortgage servicers like Andy Wood. Or see if the rush to refinance slows as fees increase later this year.

The latest Fed decision is also a nudge to examine what a long-term low-interest rate environment does to savers like Maggie Smith.

Reuters reporters Karen Brettell and Steven C. Johnson describe her as a casualty of the Fed’s strategy.  “For Smith and other pensioners struggling to cope with inflation higher than the rate of interest they earn on their savings, all of this amounts to, as she puts it, “being punished” for being prudent,” they write.

The federal funds rate, which is determined by the Fed’s actions, impacts the yields on savings accounts and CDs. It affects the interest rates on mortgages, credit cards, business and auto loans. A low federal funds rate can entice businesses to borrow, expand and hire – as the Fed hopes it will now – and drive consumers to borrow, spend and drive business growth.

Smith, the Sasses and Putnam are prime examples of how to put faces on what could easily be faceless stories. Smith is on the losing end of the Fed’s strategy to spur economic growth and job creation, while the Sasses, Putnam and Wood stand to benefit handsomely.

Theirs are just a few of many tales that illustrate how the U.S. central bank’s actions impact real people across the country. And their stories are crucial to telling the bigger story of how well the Fed’s strategy is working to bring the American economy roaring back.

In Basics, Economy, Featured, Investing | Banking.

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