The zero lower bound is the concept that the federal funds rate would not be cut below zero percent. This lower bound constraint can limit the effectiveness of monetary policy when rates are at or near the zero lower bound, especially during recessions. In our Economic Letter, The Zero Lower Bound Remains a Medium-Term Risk, we find that the risk of the federal funds rate returning to the zero lower bound is low in the near-term but higher at longer forecast horizons.
Watch our Economic Letter video to learn more about the zero lower bound and its effects on interest rates and monetary policy.
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