What Happens to HY Credit Spread (OAS) 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?
How HY Credit Spread (OAS) Responds
Scenario Background
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.
Read full scenario analysis →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 p...
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
Other Assets When the Fed Cuts Rates to Zero
Other Scenarios Affecting HY Credit Spread (OAS)
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