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Economics
Zero Interest Rate Policy
A central bank policy that sets short-term interest rates at or near zero percent to stimulate economic activity by making borrowing essentially free.
ZIRP creates a specific set of economic distortions. Savers are punished — cash loses real value to inflation while earning nothing. Investors are forced into riskier assets to find any return — this is called 'reaching for yield.' Companies can borrow cheaply to buy back stock rather than invest in productive capacity. Zombie companies that couldn't survive in a normal rate environment limp along on cheap debt refinancing.
The 'exit problem' from ZIRP proved to be one of the most challenging policy questions of the 2020s. When the Fed finally raised rates from near-zero to 5%+ in 2022-23, the speed of the adjustment caused the fastest increase in borrowing costs in 40 years. Silicon Valley Bank and other financial institutions that had loaded up on long-duration bonds assuming rates would stay low were destroyed by the sudden shift — a direct consequence of an economy that had been built around zero rates for too long.