The Federal Reserve has kept its target range for the federal funds rate at 0 to 0.25 percent since December 2008. This is often referred to as the Fed’s “zero interest rate policy,” or ZIRP. The purpose of near-zero overnight rates — and forward guidance to convince markets that those rates will be maintained — has been to affect the entire rate structure: keeping all rates lower than they would have been in a free capital market.

The idea was to lower rates in order to encourage moving into riskier assets with higher yields, including stocks, junk bonds, real estate and commodities. Lower rates, the Fed argued, would encourage greater leverage, i.e., borrowing to invest, and boost asset prices. This “wealth effect” would then stimulate consumption and economic growth.
Those were the expected benefits of the Fed’s unconventional monetary policy, which included both ZIRP and three rounds of quantitative easing (QE), that is, the large-scale purchases of longer-term securities such as government bonds, mortgage-backed securities and agency debt.
The substantial rebounding of the U.S. stock markets since the 2008 financial crisis, along with the return to near full employment while maintaining low inflation, appear to point to the Fed’s success with unconventional monetary policy. Ben Bernanke’s just published memoir, The Courage to Act, supports the bullish view that the Fed’s actions saved the U.S. economy from disaster. Yet, the former Fed chairman recognizes that “monetary policy is no panacea.”