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Monday, July 7, 2025

Fed Sees 9% Chance Rates Fall Back to Zero

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“Compared with the past decade, current data show that expected levels of future interest rates are high,” Williams and his co-authors wrote. (Samuel Corum/Bloomberg)

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The Federal Reserve can’t assume its benchmark lending rate won’t return to zero at some point in the future, according to a group of New York Fed researchers including the bank’s president, John Williams.

The authors, in a blog post published July 7, found a 9% probability the federal funds rate would hit the so-called zero lower bound, or ZLB, over a seven-year horizon, with the current high level of interest-rate uncertainty contributing to that risk.

“Compared with the past decade, current data show that expected levels of future interest rates are high,” Williams and his co-authors wrote. “Nevertheless, ZLB risk remains significant over the medium to long term, similar to levels observed in 2018, due to recent elevated uncertainty.”

The authors based their analysis on interest-rate derivatives tied to the outlooks for key short-term rates, such as the Secured Overnight Financing Rate, that tend to move closely with the fed funds rate.

(Federal Reserve via Bloomberg)

The study found a 1% chance that rates would hit zero in the next two years.

Fed officials first dropped rates to a range of zero to 0.25% in December 2008 during the Great Financial Crisis as part of an attempt to stimulate the economy. They remained there for seven years. Rates plunged back to zero for another two years following the outbreak of the COVID-19 pandemic in 2020.

RELATED: Fed to Wait to Reduce Interest Rates as Trump Demands Cuts

Policymakers and economists have questioned whether the post-COVID inflation surge and higher growth may have ended the period in which monetary policy operated in the shadow of the ZLB.

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