The Fed researchers' latest deep dive: they're using LIBOR and SOFR derivatives to plot out the odds of the fed funds rate sliding back to zero.
Think of it like reading tea leaves in the markets—by turning those contracts into daily probability curves, they can see how expectations and uncertainty shape the risk of hitting the zero lower bound (ZLB) again.
Here's the scoop: on May 27, the market still put about a 9% chance on rates being back at zero seven years out. If everyone's betting on higher rates, that number falls—makes sense. But bump up the uncertainty, and poof, the ZLB odds tick right back up. It's a pattern we saw around 2018, too.
Why should you care? Because if rates ever do hit zero, the Fed's usual rate-cut toolkit is gone, and they have to lean on big, unconventional moves—think QE reboot. Even though rate forecasts are healthy now, plenty of wiggle room in those forecasts means we can't discount another ZLB run.
Oh, and just so you know where the market stands today: the U.S. 7-year note yield recently popped up to about 4.16%. That's the backdrop to all these probability plays—higher yields, higher expectations, but still a nontrivial chance that zero is back on the table down the road.
