What Happens When the Fed Cuts Rates to Zero?
Zero interest-rate policy (ZIRP) marks extreme monetary easing. What happens to markets, saving, and the economy when the Fed takes policy rates to zero?
Trigger: Federal Funds Rate falls to 0-0.25%
The Mechanics
The Federal Reserve sets the fed funds rate in a target range. A target of 0-0.25% represents the effective lower bound (ELB), the point beyond which conventional rate policy can no longer stimulate. Reaching zero signals the Fed views conventional policy as insufficient and is deploying emergency measures.
Once at the ELB, the Fed typically adds forward guidance (promising to hold rates low for extended periods) and quantitative easing (asset purchases expanding the balance sheet). These tools work through different channels: forward guidance lowers expected future short rates, while QE compresses term premia and credit spreads.
ZIRP has only been used twice in US history: 2008-2015 (following the Great Financial Crisis) and 2020-2022 (COVID). Both episodes featured massive balance-sheet expansion and explicit forward guidance. The challenge is exiting: premature tightening can trigger deflationary spirals (see Japan 1990s), while delayed tightening risks inflation (see 2022 experience).
Historical Context
The Fed took rates to 0-0.25% on December 16, 2008, and held them there until December 2015, seven years at the zero bound. The exit featured four rounds of QE (QE1, QE2, Operation Twist, QE3), forward guidance that evolved from calendar-based to state-contingent (tying rate hikes to unemployment and inflation thresholds). The 2020 ZIRP began March 15, 2020, with emergency 100 bp cut to zero, massive QE ($120B/month in Treasuries and MBS), and dovish forward guidance. Exit began March 2022 but proved far more rapid than 2015-2019: 525 bps of tightening in 16 months vs the 300 bps spread over 3 years (2015-2018). Inflation outcomes differed dramatically: 2008-era ZIRP never produced sustained inflation; 2020-era produced the worst inflation since 1982.
Market Impact
Historically bullish for equities over the medium term. The 2009-2015 ZIRP coincided with the S&P rising from 700 to 2100. The 2020 ZIRP produced a V-shaped recovery and then a historic rally.
10Y yields typically fall to 1.5-2.5% range, well below nominal GDP growth. The 2020 ZIRP saw 10Y bottom at 0.5%. TIPS real yields often go negative.
Duration-sensitive growth assets benefit disproportionately. QQQ outperformed SPY by wide margins during both ZIRP episodes as low discount rates boosted long-duration equity valuations.
Money-market yields fall to near zero, punishing savers. Households shift from deposits to equities and real estate, often creating asset-price distortions.
Dollar typically weakens at the announcement but the subsequent path depends on foreign policy. 2008-style ZIRP coinciding with global easing produces weaker dollar effects than US-specific ZIRP.
Gold rallies sharply at ZIRP implementation (2008, 2020). Real yields plunge and currency debasement concerns rise. Both episodes saw gold gain 50%+ over the subsequent years.
What to Watch For
- -Unemployment rising rapidly toward 8%+
- -Core inflation below 1% for sustained periods (disinflation risk)
- -Credit spreads blowing out above 700 bps (financial stress)
- -ISM Manufacturing below 40 confirming deep recession
- -Fed balance-sheet expansion announcement accompanying rate cuts
How to Interpret Current Conditions
ZIRP is only deployed in response to severe economic stress: financial crisis, pandemic, or prolonged recession. Watch the Fed funds futures curve for market expectations of Fed cuts and the 2Y yield as a market-implied forecast of rates 1-2 years forward.
Per-Asset Deep Dives
Dedicated analysis of how this scenario affects each asset class individually.
Historically bullish for equities over the medium term. The 2009-2015 ZIRP coincided with the S&P rising from 700 to 2100. The 2020 ZIRP produced a V-shaped recovery and then a historic rally.
10Y yields typically fall to 1.5-2.5% range, well below nominal GDP growth. The 2020 ZIRP saw 10Y bottom at 0.5%. TIPS real yields often go negative.
Duration-sensitive growth assets benefit disproportionately. QQQ outperformed SPY by wide margins during both ZIRP episodes as low discount rates boosted long-duration equity valuations.
Money-market yields fall to near zero, punishing savers. Households shift from deposits to equities and real estate, often creating asset-price distortions.
Dollar typically weakens at the announcement but the subsequent path depends on foreign policy. 2008-style ZIRP coinciding with global easing produces weaker dollar effects than US-specific ZIRP.
Gold rallies sharply at ZIRP implementation (2008, 2020). Real yields plunge and currency debasement concerns rise. Both episodes saw gold gain 50%+ over the subsequent years.
When the Fed Cuts Rates to Zero, HY Credit Spread (OAS) typically responds to the changing macro environment. ICE BofA High Yield Option-Adjusted Spread, the market's price of default risk. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for HY Credit Spread (OAS). Investors should monitor both the trigger condition and HY Credit Spread (OAS)'s response to position accordingly.
When the Fed Cuts Rates to Zero, IG Credit Spread (OAS) typically responds to the changing macro environment. ICE BofA Investment Grade OAS, credit stress in high-quality corporate bonds. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for IG Credit Spread (OAS). Investors should monitor both the trigger condition and IG Credit Spread (OAS)'s response to position accordingly.
When the Fed Cuts Rates to Zero, HY Effective Yield typically responds to the changing macro environment. HY corporate bond effective yield, total return required by junk bond investors. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for HY Effective Yield. Investors should monitor both the trigger condition and HY Effective Yield's response to position accordingly.
When the Fed Cuts Rates to Zero, IG Effective Yield typically responds to the changing macro environment. IG corporate bond effective yield, cost of investment-grade corporate borrowing. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for IG Effective Yield. Investors should monitor both the trigger condition and IG Effective Yield's response to position accordingly.
When the Fed Cuts Rates to Zero, BBB Credit Spread typically responds to the changing macro environment. BBB-rated corporate bond OAS, the lowest rung of investment grade. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for BBB Credit Spread. Investors should monitor both the trigger condition and BBB Credit Spread's response to position accordingly.
When the Fed Cuts Rates to Zero, AAA Credit Spread typically responds to the changing macro environment. AAA-rated corporate bond OAS, flight-to-quality indicator. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for AAA Credit Spread. Investors should monitor both the trigger condition and AAA Credit Spread's response to position accordingly.
When the Fed Cuts Rates to Zero, Aaa-10Y Treasury Spread typically responds to the changing macro environment. Moody's Aaa corporate minus 10Y Treasury, credit risk premium for top-rated corporates. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for Aaa-10Y Treasury Spread. Investors should monitor both the trigger condition and Aaa-10Y Treasury Spread's response to position accordingly.
When the Fed Cuts Rates to Zero, Baa-10Y Treasury Spread typically responds to the changing macro environment. Moody's Baa minus 10Y Treasury, a wider measure of corporate credit risk. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for Baa-10Y Treasury Spread. Investors should monitor both the trigger condition and Baa-10Y Treasury Spread's response to position accordingly.
When the Fed Cuts Rates to Zero, Financial Conditions (NFCI) typically responds to the changing macro environment. Chicago Fed National Financial Conditions Index, positive = tighter than average. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for Financial Conditions (NFCI). Investors should monitor both the trigger condition and Financial Conditions (NFCI)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Adjusted NFCI typically responds to the changing macro environment. NFCI adjusted for prevailing economic conditions, isolates financial stress from the cycle. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for Adjusted NFCI. Investors should monitor both the trigger condition and Adjusted NFCI's response to position accordingly.
When the Fed Cuts Rates to Zero, Financial Stress Index (StL) typically responds to the changing macro environment. St. Louis Fed Financial Stress Index, below zero = below-average stress. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for Financial Stress Index (StL). Investors should monitor both the trigger condition and Financial Stress Index (StL)'s response to position accordingly.
When the Fed Cuts Rates to Zero, SLOOS: C&I Loan Tightening typically responds to the changing macro environment. Senior Loan Officer Survey, net % of banks tightening standards on C&I loans. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for SLOOS: C&I Loan Tightening. Investors should monitor both the trigger condition and SLOOS: C&I Loan Tightening's response to position accordingly.
When the Fed Cuts Rates to Zero, SLOOS: Credit Card Tightening typically responds to the changing macro environment. Net % of banks tightening credit card lending standards. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for SLOOS: Credit Card Tightening. Investors should monitor both the trigger condition and SLOOS: Credit Card Tightening's response to position accordingly.
When the Fed Cuts Rates to Zero, Credit Card Delinquency Rate typically responds to the changing macro environment. Delinquency rate on credit card loans, consumer stress indicator. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for Credit Card Delinquency Rate. Investors should monitor both the trigger condition and Credit Card Delinquency Rate's response to position accordingly.
When the Fed Cuts Rates to Zero, Housing Starts typically responds to the changing macro environment. New privately-owned housing units started, leading indicator of construction activity. This scenario is particularly relevant for housing because changes in Federal Funds Rate directly influence the macro environment for Housing Starts. Investors should monitor both the trigger condition and Housing Starts's response to position accordingly.
When the Fed Cuts Rates to Zero, Building Permits typically responds to the changing macro environment. New privately-owned building permits, leading indicator of future housing starts. This scenario is particularly relevant for housing because changes in Federal Funds Rate directly influence the macro environment for Building Permits. Investors should monitor both the trigger condition and Building Permits's response to position accordingly.
When the Fed Cuts Rates to Zero, New Home Sales typically responds to the changing macro environment. Sales of new single-family houses, sensitive to mortgage rates and consumer confidence. This scenario is particularly relevant for housing because changes in Federal Funds Rate directly influence the macro environment for New Home Sales. Investors should monitor both the trigger condition and New Home Sales's response to position accordingly.
When the Fed Cuts Rates to Zero, Case-Shiller Home Price Index typically responds to the changing macro environment. S&P CoreLogic Case-Shiller national home price index. This scenario is particularly relevant for housing because changes in Federal Funds Rate directly influence the macro environment for Case-Shiller Home Price Index. Investors should monitor both the trigger condition and Case-Shiller Home Price Index's response to position accordingly.
When the Fed Cuts Rates to Zero, Months Supply of Houses typically responds to the changing macro environment. Months of unsold housing inventory, below 4 = seller's market, above 6 = buyer's market. This scenario is particularly relevant for housing because changes in Federal Funds Rate directly influence the macro environment for Months Supply of Houses. Investors should monitor both the trigger condition and Months Supply of Houses's response to position accordingly.
When the Fed Cuts Rates to Zero, 30Y Mortgage Rate typically responds to the changing macro environment. 30-year fixed mortgage rate, the primary driver of housing affordability. This scenario is particularly relevant for housing because changes in Federal Funds Rate directly influence the macro environment for 30Y Mortgage Rate. Investors should monitor both the trigger condition and 30Y Mortgage Rate's response to position accordingly.
When the Fed Cuts Rates to Zero, WTI Crude Oil (FRED) typically responds to the changing macro environment. West Texas Intermediate crude oil spot price. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for WTI Crude Oil (FRED). Investors should monitor both the trigger condition and WTI Crude Oil (FRED)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Brent Crude Oil (FRED) typically responds to the changing macro environment. Brent crude oil spot price, the global benchmark. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for Brent Crude Oil (FRED). Investors should monitor both the trigger condition and Brent Crude Oil (FRED)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Henry Hub Natural Gas typically responds to the changing macro environment. Henry Hub natural gas spot price, US benchmark. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for Henry Hub Natural Gas. Investors should monitor both the trigger condition and Henry Hub Natural Gas's response to position accordingly.
When the Fed Cuts Rates to Zero, Copper Price (Global) typically responds to the changing macro environment. Global copper price, "Dr. Copper" is a leading economic indicator. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for Copper Price (Global). Investors should monitor both the trigger condition and Copper Price (Global)'s response to position accordingly.
When the Fed Cuts Rates to Zero, EM Dollar Index typically responds to the changing macro environment. Dollar index weighted by emerging-market trading partners. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for EM Dollar Index. Investors should monitor both the trigger condition and EM Dollar Index's response to position accordingly.
When the Fed Cuts Rates to Zero, EUR/USD typically responds to the changing macro environment. Euro to US dollar exchange rate. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for EUR/USD. Investors should monitor both the trigger condition and EUR/USD's response to position accordingly.
When the Fed Cuts Rates to Zero, JPY/USD typically responds to the changing macro environment. Japanese yen to US dollar exchange rate. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for JPY/USD. Investors should monitor both the trigger condition and JPY/USD's response to position accordingly.
When the Fed Cuts Rates to Zero, CNY/USD typically responds to the changing macro environment. Chinese yuan to US dollar exchange rate. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for CNY/USD. Investors should monitor both the trigger condition and CNY/USD's response to position accordingly.
When the Fed Cuts Rates to Zero, BRL/USD typically responds to the changing macro environment. Brazilian real to US dollar exchange rate. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for BRL/USD. Investors should monitor both the trigger condition and BRL/USD's response to position accordingly.
When the Fed Cuts Rates to Zero, Real Effective Exchange Rate typically responds to the changing macro environment. BIS real effective exchange rate for the US dollar, inflation-adjusted competitiveness. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for Real Effective Exchange Rate. Investors should monitor both the trigger condition and Real Effective Exchange Rate's response to position accordingly.
When the Fed Cuts Rates to Zero, Trade Balance typically responds to the changing macro environment. US trade balance in goods and services, negative = trade deficit. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for Trade Balance. Investors should monitor both the trigger condition and Trade Balance's response to position accordingly.
When the Fed Cuts Rates to Zero, Bitcoin typically responds to the changing macro environment. Bitcoin spot price, the original cryptocurrency and macro risk-on barometer. This scenario is particularly relevant for crypto because changes in Federal Funds Rate directly influence the macro environment for Bitcoin. Investors should monitor both the trigger condition and Bitcoin's response to position accordingly.
When the Fed Cuts Rates to Zero, Ethereum typically responds to the changing macro environment. Ethereum spot price, the leading smart contract platform token. This scenario is particularly relevant for crypto because changes in Federal Funds Rate directly influence the macro environment for Ethereum. Investors should monitor both the trigger condition and Ethereum's response to position accordingly.
When the Fed Cuts Rates to Zero, WTI Crude Oil typically responds to the changing macro environment. WTI crude oil price from market feeds. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for WTI Crude Oil. Investors should monitor both the trigger condition and WTI Crude Oil's response to position accordingly.
When the Fed Cuts Rates to Zero, Brent Crude Oil typically responds to the changing macro environment. Brent crude oil price, the global benchmark. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for Brent Crude Oil. Investors should monitor both the trigger condition and Brent Crude Oil's response to position accordingly.
When the Fed Cuts Rates to Zero, Natural Gas typically responds to the changing macro environment. Natural gas spot price. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for Natural Gas. Investors should monitor both the trigger condition and Natural Gas's response to position accordingly.
When the Fed Cuts Rates to Zero, Dow Jones ETF (DIA) typically responds to the changing macro environment. SPDR Dow Jones Industrial Average ETF, tracks the 30 blue-chip Dow components. This scenario is particularly relevant for equity index because changes in Federal Funds Rate directly influence the macro environment for Dow Jones ETF (DIA). Investors should monitor both the trigger condition and Dow Jones ETF (DIA)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Russell 2000 ETF (IWM) typically responds to the changing macro environment. iShares Russell 2000 ETF, small-cap equity benchmark. This scenario is particularly relevant for equity index because changes in Federal Funds Rate directly influence the macro environment for Russell 2000 ETF (IWM). Investors should monitor both the trigger condition and Russell 2000 ETF (IWM)'s response to position accordingly.
When the Fed Cuts Rates to Zero, S&P 500 Equal Weight (RSP) typically responds to the changing macro environment. Equal-weight S&P 500, measures market breadth vs cap-weighted SPY. This scenario is particularly relevant for equity index because changes in Federal Funds Rate directly influence the macro environment for S&P 500 Equal Weight (RSP). Investors should monitor both the trigger condition and S&P 500 Equal Weight (RSP)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Emerging Markets (EEM) typically responds to the changing macro environment. iShares MSCI Emerging Markets ETF. This scenario is particularly relevant for equity index because changes in Federal Funds Rate directly influence the macro environment for Emerging Markets (EEM). Investors should monitor both the trigger condition and Emerging Markets (EEM)'s response to position accordingly.
When the Fed Cuts Rates to Zero, China Large-Cap (FXI) typically responds to the changing macro environment. iShares China Large-Cap ETF, proxy for Chinese equity market. This scenario is particularly relevant for equity index because changes in Federal Funds Rate directly influence the macro environment for China Large-Cap (FXI). Investors should monitor both the trigger condition and China Large-Cap (FXI)'s response to position accordingly.
When the Fed Cuts Rates to Zero, EAFE Developed (EFA) typically responds to the changing macro environment. iShares MSCI EAFE ETF, developed markets excluding US and Canada. This scenario is particularly relevant for equity index because changes in Federal Funds Rate directly influence the macro environment for EAFE Developed (EFA). Investors should monitor both the trigger condition and EAFE Developed (EFA)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Germany / DAX (EWG) typically responds to the changing macro environment. iShares MSCI Germany ETF, proxy for the DAX and German equity market. This scenario is particularly relevant for equity index because changes in Federal Funds Rate directly influence the macro environment for Germany / DAX (EWG). Investors should monitor both the trigger condition and Germany / DAX (EWG)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Japan / Nikkei (EWJ) typically responds to the changing macro environment. iShares MSCI Japan ETF, proxy for the Nikkei 225 and Japanese equity market. This scenario is particularly relevant for equity index because changes in Federal Funds Rate directly influence the macro environment for Japan / Nikkei (EWJ). Investors should monitor both the trigger condition and Japan / Nikkei (EWJ)'s response to position accordingly.
When the Fed Cuts Rates to Zero, 20Y+ Treasury (TLT) typically responds to the changing macro environment. iShares 20+ Year Treasury Bond ETF, long-duration rates proxy. This scenario is particularly relevant for bonds & duration because changes in Federal Funds Rate directly influence the macro environment for 20Y+ Treasury (TLT). Investors should monitor both the trigger condition and 20Y+ Treasury (TLT)'s response to position accordingly.
When the Fed Cuts Rates to Zero, 7-10Y Treasury (IEF) typically responds to the changing macro environment. iShares 7-10 Year Treasury Bond ETF. This scenario is particularly relevant for bonds & duration because changes in Federal Funds Rate directly influence the macro environment for 7-10Y Treasury (IEF). Investors should monitor both the trigger condition and 7-10Y Treasury (IEF)'s response to position accordingly.
When the Fed Cuts Rates to Zero, 1-3Y Treasury (SHY) typically responds to the changing macro environment. iShares 1-3 Year Treasury Bond ETF, short duration. This scenario is particularly relevant for bonds & duration because changes in Federal Funds Rate directly influence the macro environment for 1-3Y Treasury (SHY). Investors should monitor both the trigger condition and 1-3Y Treasury (SHY)'s response to position accordingly.
When the Fed Cuts Rates to Zero, High Yield Credit (HYG) typically responds to the changing macro environment. iShares iBoxx High Yield Corporate Bond ETF. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for High Yield Credit (HYG). Investors should monitor both the trigger condition and High Yield Credit (HYG)'s response to position accordingly.
When the Fed Cuts Rates to Zero, IG Credit (LQD) typically responds to the changing macro environment. iShares iBoxx Investment Grade Corporate Bond ETF. This scenario is particularly relevant for credit & financial stress because changes in Federal Funds Rate directly influence the macro environment for IG Credit (LQD). Investors should monitor both the trigger condition and IG Credit (LQD)'s response to position accordingly.
When the Fed Cuts Rates to Zero, TIPS (TIP) typically responds to the changing macro environment. iShares TIPS Bond ETF, inflation-protected Treasuries. This scenario is particularly relevant for bonds & duration because changes in Federal Funds Rate directly influence the macro environment for TIPS (TIP). Investors should monitor both the trigger condition and TIPS (TIP)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Gold ETF (GLD) typically responds to the changing macro environment. SPDR Gold Shares, largest gold ETF. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for Gold ETF (GLD). Investors should monitor both the trigger condition and Gold ETF (GLD)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Oil ETF (USO) typically responds to the changing macro environment. United States Oil Fund, WTI crude oil futures ETF. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for Oil ETF (USO). Investors should monitor both the trigger condition and Oil ETF (USO)'s response to position accordingly.
When the Fed Cuts Rates to Zero, Agriculture ETF (DBA) typically responds to the changing macro environment. Invesco DB Agriculture Fund, broad agricultural commodities. This scenario is particularly relevant for commodities because changes in Federal Funds Rate directly influence the macro environment for Agriculture ETF (DBA). Investors should monitor both the trigger condition and Agriculture ETF (DBA)'s response to position accordingly.
When the Fed Cuts Rates to Zero, US Dollar Bull (UUP) typically responds to the changing macro environment. Invesco DB US Dollar Index Bullish Fund. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for US Dollar Bull (UUP). Investors should monitor both the trigger condition and US Dollar Bull (UUP)'s response to position accordingly.
When the Fed Cuts Rates to Zero, GBP/USD (FRED) typically responds to the changing macro environment. GBP/USD exchange rate from FRED. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for GBP/USD (FRED). Investors should monitor both the trigger condition and GBP/USD (FRED)'s response to position accordingly.
When the Fed Cuts Rates to Zero, GBP/USD typically responds to the changing macro environment. GBP/USD spot rate from Yahoo Finance. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for GBP/USD. Investors should monitor both the trigger condition and GBP/USD's response to position accordingly.
When the Fed Cuts Rates to Zero, EUR/GBP typically responds to the changing macro environment. EUR/GBP spot rate. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for EUR/GBP. Investors should monitor both the trigger condition and EUR/GBP's response to position accordingly.
When the Fed Cuts Rates to Zero, CAD/USD typically responds to the changing macro environment. Canadian dollar per US dollar. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for CAD/USD. Investors should monitor both the trigger condition and CAD/USD's response to position accordingly.
When the Fed Cuts Rates to Zero, MXN/USD typically responds to the changing macro environment. Mexican peso per US dollar. This scenario is particularly relevant for fx & dollar because changes in Federal Funds Rate directly influence the macro environment for MXN/USD. Investors should monitor both the trigger condition and MXN/USD's response to position accordingly.
Frequently Asked Questions
What triggers the "the Fed Cuts Rates to Zero" scenario?▾
The scenario activates when falls to 0-0.25%. The trigger metric and its current reading are shown on this page, so the live state of the scenario is always visible rather than abstract. Convex tracks this trigger continuously and flags crossings within hours.
Which assets are most affected when this scenario unfolds?▾
The Market Impact section lists the full asset-by-asset response, but the primary affected assets include: US Equities (S&P 500), Treasury Yields (10Y), Growth/Tech (QQQ), Savers (Money Market). Each asset has historically shown a characteristic pattern of response that is described in detail on the per-asset deep-dive pages linked below.
How often has this scenario played out historically?▾
The Fed took rates to 0-0.25% on December 16, 2008, and held them there until December 2015, seven years at the zero bound. The exit featured four rounds of QE (QE1, QE2, Operation Twist, QE3), forward guidance that evolved from calendar-based to state-contingent (tying rate hikes to unemployment and inflation thresholds). The 2020 ZIRP began March 15, 2020, with emergency 100 bp cut to zero, massive QE ($120B/month in Treasuries and MBS), and dovish forward guidance. Exit began March 2022 but proved far more rapid than 2015-2019: 525 bps of tightening in 16 months vs the 300 bps spread over 3 years (2015-2018). Inflation outcomes differed dramatically: 2008-era ZIRP never produced sustained inflation; 2020-era produced the worst inflation since 1982.
What should I watch for next?▾
The most important signals to track while this scenario is active: Unemployment rising rapidly toward 8%+; Core inflation below 1% for sustained periods (disinflation risk). The full list is on this page under "What to Watch For." These signals are the ones that historically preceded the scenario either resolving or accelerating.
How should I interpret the current state of this scenario?▾
ZIRP is only deployed in response to severe economic stress: financial crisis, pandemic, or prolonged recession. Watch the Fed funds futures curve for market expectations of Fed cuts and the 2Y yield as a market-implied forecast of rates 1-2 years forward.
Is this a prediction or a conditional analysis?▾
This is conditional analysis, not a prediction that the scenario will happen. Convex describes what typically follows once the trigger fires and shows how close or far the current data is from that trigger. The page is informational; it does not constitute financial advice.
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This content is educational and for informational purposes only. It does not constitute financial advice. Historical patterns do not guarantee future results. Data sourced from FRED, market feeds, and public economic releases.