Zero-Bound

DEFINITION of 'Zero-Bound'

A situation that occurs when the Federal Reserve has lowered short-term interest rates to zero or nearly zero. When interest rates are this low, new methods of economic stimulus must be examined and implemented.


Zero-bound can also refer to a stock that has negative downward momentum and is expected to eventually move to zero.

BREAKING DOWN 'Zero-Bound'

As the Federal Reserve lowers interest rates, alternative procedures for monetary stimulus become necessary. Interest rates cannot usually be negative, so once interest rates reach zero or are close to zero, for example, 0.01%, monetary policy has to be altered to continue to stabilize or stimulate the economy.

RELATED TERMS
  1. Zero Percent

    A promotional rate of interest used to entice consumers, often ...
  2. Disparity Index

    A technical indicator that measures the relative position of ...
  3. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  4. Zero Balance Account - ZBA

    A checking account in which a balance of zero is maintained by ...
  5. Zero Minus Tick

    A securities trade executed on an exchange at the same price ...
  6. Negative Interest Rate

    Negative interest rates refer to the case when cash deposits ...
Related Articles
  1. Investing News

    3 Times Negative Yields Were Instituted This Century

    Discover why several major global banks decided to test the radical economic policy of negative interest rates and the implications of those actions.
  2. Economics

    What is Zero Interest-Rate Policy (ZIRP)?

    In the years following the financial crisis, several central banks have turned to zero interest-rate policy to aid economic recovery.
  3. Economics

    When Will Interest Rates Rise?

    Find out if -- and why -- the Federal Reserve will keep raising interest rates and what that might mean for savers, investors and the entire economy.
  4. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  5. Economics

    Negative Interest Rate Policy (NIRP)

    A negative interest rate policy is an unconventional monetary policy tool in which nominal target interest rates are set below zero.
  6. Investing News

    Why Positive Economic Data Pushes the Market Down

    Unemployment comes in higher than analysts’ expectations, and the market rallies 1% instead of dropping. GDP growth exceeds expectations slightly, and markets drop. Why could this be happening?
  7. Economics

    Open Market Operations vs. Quantitative Easing

    How does the Fed's implementation of Quantitative Easing differ from its more conventional open market operations?
  8. Products and Investments

    How Negative Rates Could Hammer Your Retirement

    Negative interest rates could wreak havoc on savings, bonds, the stock market and more. Here's what to be aware of if the unlikely becomes reality.
  9. Economics

    Should Interest Rates Go Up?

    An increase in interest rates could prove that that the Fed really believes the U.S. economy is starting to grow.
  10. Economics

    How Unconventional Monetary Policy Works

    Unconventional monetary policy, such as quantitative easing, can be used to jump-start economic growth and spur demand.
RELATED FAQS
  1. Why do zero coupon bonds tend to be volatile?

    Learn why the price of zero coupon bonds is volatile and why some investors may wish to hold them in retirement accounts ... Read Answer >>
  2. What are the implications of a low Federal Funds Rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
  3. How does the equity risk premium correlate with the Federal Reserve's prime rate?

    Learn about how the equity risk premium correlates with the Federal Reserve's prime rate. The Fed adjusts the prime rate ... Read Answer >>
  4. If an investor has a required rate of return of 10% on a 20-year zero ...

    The correct answer is d. The value of a zero coupon bond is the present value of the lump-sum principal payment. There is ... Read Answer >>
  5. What are the goals of a "dove" Federal Reserve head?

    Find out more about the goals of a dovish Federal Reserve Bank chair and how the chair leverages low interest rates to spur ... Read Answer >>
  6. Do interest rates increase during a recession?

    Learn why interest rates do not rise in a recession; in fact, the opposite happens. Identify the factors that reduce interest ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center