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The Zero Lower Bound Remains a Medium-Term Risk

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Abstract

Financial markets—specifically derivatives—contain information about the range of probable future short-term interest rates. The information from this statistical distribution can help measure the perceived risk of interest rates returning to the zero lower bound in the future. The risk varies over time, driven mainly by the expected level of interest rates. At longer forecast horizons, a higher risk of returning to the lower bound primarily reflects a higher amount of uncertainty. Currently, the perceived risk appears slim over the next few years but is significant at longer horizons.

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  • Sophia Cho & Thomas M. Mertens & John C. Williams, 2025. "The Zero Lower Bound Remains a Medium-Term Risk," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2025(16), pages 1-6, July.
    • Handle: RePEc:fip:fedfel:101204
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    1. Thomas M. Mertens & John C. Williams, 2021. "What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices," American Economic Review, American Economic Association, vol. 111(8), pages 2473-2505, August.
    2. Michael D. Bauer & Thomas M. Mertens, 2019. "Zero Lower Bound Risk according to Option Prices," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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