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-Bound Interest Rate

    The lowest percentage of owed principal that a central bank can ...
  2. Zero Percent

    A promotional rate of interest used to entice consumers, often ...
  3. Negative Interest Rate Environment

    A negative interest rate environment exists when a central bank ...
  4. Disparity Index

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

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  6. Zero Minus Tick

    A securities trade executed on an exchange at the same price ...
Related Articles
  1. Investing

    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. Markets

    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. Markets

    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. Managing Wealth

    What to Make of a Zero Percent Yield

    Interest rates hit a new bottom earlier this month when three-month Treasury bills (T-bills) were sold at a zero percent yield for the first time ever.
  5. Markets

    A Red Flag to the U.S. Equity Market: Rate Hikes

    Discover why the Federal Reserve may raise interest rates in 2016, why that might be necessary and why equity markets might not like it.
  6. Markets

    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.
  7. Markets

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  8. Markets

    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?
  9. Trading

    Momentum Indicates Stock Price Strength

    Momentum can be used with other tools to be an effective buy/sell indicator.
  10. Markets

    Open Market Operations vs. Quantitative Easing

    How does the Fed's implementation of Quantitative Easing differ from its more conventional open market operations?
RELATED FAQS
  1. Why would investors with lots of cash invest in bonds with negative yield?

  2. 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 >>
  3. Do lower interest rates increase investment spending?

    Learn how the Federal Reserve Board uses monetary policy and the federal funds rate to influence long-term interest rates ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center