Dealers Saw 20% Chance of Fed Back at Zero in Two Years

Odds that the Federal Reserve will have to return its benchmark interest rate to zero within two years of beginning to raise it have increased a bit, according to banks and brokerage firms that trade directly with the central bank.

The most likely reason for such a reversal would be an adverse shock to the U.S. economy, said the 22 primary dealers surveyed by the New York Fed ahead of the Federal Open Market Committee’s Jan. 27-28 meeting in Washington.

The survey, released on Thursday, was distributed on Jan. 15 and results were collected by Jan. 20. Minutes of the Fed’s meeting last month released on Wednesday showed many officials were inclined to leave rates near zero for longer due to the risks they saw to the U.S. economy.

Dealers in January saw a 20 percent chance that the Fed would be forced to cut the federal funds rate to zero within two years of liftoff, up from 17 percent in December, based on median estimates. This coming June was seen as the most likely meeting at which the FOMC would begin raising the rate from near zero, where it has been held since December 2008.

Other reasons the Fed may have to return rates to zero mentioned by survey respondents, in order of importance, included a premature increase in the fed funds rate this year, fallout from financial instability, and headwinds to the U.S. economy from adverse developments overseas.

The New York Fed conducted a separate survey over the same period posing the same question to a panel of market participants, made up mostly of large investment firms including BlackRock Inc. and Vanguard Group Inc.

The median respondent among 27 of those firms saw a 25 percent chance in January that the fed funds rate would return to zero within two years, up from 20 percent in December.

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