According to a report by New York Federal Reserve researchers, including President John Williams, the Federal Reserve cannot rule out the possibility of its benchmark lending rate dropping to zero at some point in the future. The researchers highlighted a 9% probability of the federal funds rate hitting the "zero lower bound" (ZLB) within the next seven years, primarily due to high current interest rate uncertainty.
The analysis, based on derivatives of key short-term rates closely tied to the federal funds rate, indicates that although expected future rates are higher compared to the last decade, the risk of reaching the ZLB remains significant in the medium to long term, similar to 2018 levels. The probability of rates falling to zero within the next two years is estimated at 1%.
The Federal Reserve initially lowered rates to the 0% to 0.25% range during the global financial crisis in December 2008 to stimulate the economy, maintaining this level for seven years. Rates were again reduced to zero during the COVID-19 pandemic in 2020, holding for two years.
