Zero-Bound

Zero-bound is like a status: Report! Zero-bound status incoming from the central bank!

Zero-bound is the status of the central bank’s interest rates when they’ve lowered short-term interest rates to zero (or close to it). This is the rate that banks pay on short-term loans from the Fed. When banks can borrow at zero-bound, it’s basically a free loan. These savings can then be passed onto customers via lower interest rates on all kinds of loans from banks to your average Joes.

The Fed usually does this to encourage economic activity. They give a break to banks, who give a break to you and your Mom. By making it cheaper (or, in this case, basically free) to borrow money, it (hopefully) helps boost the economy when it’s slumping.

But zero-bound is considered dangerous by some, because if the Fed does this and doesn’t stimulate the economy very much, it doesn't have many cards left to try boosting the economy, which is...kind of their job.

If zero-bound is plan A for central banks, what’s plan B if plan A fails? Well, central banks in some countries got creative and went below zero bound. That’s right. The central banks said, “Hey you, we’ll pay you money if you borrow money and spend it. Yes, we really are that desperate.”

Crazy, or ingenious? Well, the world stage has mostly decided “ingenious.” Sweden was the first to do this in 2009 (after the 2008 recession). The European Central Bank and the Bank of Japan were copycats, as well as other central banks.