Will we ever go back to zero interest rates? 

From 2020-2022, interest rates were near zero.

At its latest meeting, the Federal Reserve kept interest rates unchanged, and is projected to cut interest rates only once this year. 

As the Fed has raised rates, housing costs have remained high and are still increasing despite high mortgage rates, locking many people out of buying a home. Some lawmakers, including Senator Elizabeth Warren of Massachusetts and Senator John Hickenlooper of Colorado, are urging the Federal Reserve to make rate cuts because of the effect of rates on housing and car insurance costs.

While consumer prices were up 3.3% year-over-year, an unexpectedly low figure, inflation is still too high for the Federal Reserve, which is why it’s moving cautiously. “The Fed is trying to be very careful that they do not start to reduce interest rates, until they’re sure that they’re well on track to be hitting the target of 2% inflation,” said Robert Triest, an economics professor at Northeastern University. 

In March 2022, the Fed began raising rates after a two-year period of near-zero interest rates in order to tame inflation. 

When interest rates are low, it’s easier for people to borrow money, and when they go up, it becomes harder. During the period of near-zero rates, consumers benefited from lower mortgage, credit card and auto loan rates. 

And low interest rates can help spur employment. If rates begin to rise, that can negatively impact the job market. For example, higher rates make it tougher to borrow money to build an apartment complex, said Tyler Schipper, an associate professor of economics at University of St. Thomas. 

“When that apartment complex doesn’t get built, it means that general contractors don’t need to hire as much labor, which means that manufacturers that produce metal parts that go into those buildings don’t need as many workers,” Schipper said. This also affects real estate developers and construction workers, he added. 

Keeping rates too high for too long will also negatively impact the lowest-income groups, since they have the most exposure to debt, said Brian Bethune, an economics professor at Boston College. “The longer you keep rates high, at a punishing high rate, the more you’re going to exacerbate what already is a very unequal distribution of income and wealth,” he said. 

But while some were able to reap plenty of advantages from lower interest rates and lament the days of “easy money,” economists say they hope the Fed won’t have to cut rates back down to zero again. One of the reasons is because another recession is “always around the corner,” which means if we’re at zero interest rates, the Fed will have to use other policy measures to combat the economic downturn, Schipper said. The U.S. has, on average, a recession every six to seven years. 

“Moving away to more normalized monetary policy allows them to react to the next recession,” Schipper said. 

Barring another bad recession or an emergency, cutting rates back down to zero won’t be necessary, Triest said.

Generally, job losses follow an increase in interest rates, Triest said. But the labor market has been resilient as the Fed has raised rates this time around — the unemployment rate has increased, but is still at a low rate of 4%, he added.   

While rising interest rates can hurt those who are lower-income because they’re more likely to be borrowers, keeping them artificially low can hurt them in the long run, Schipper said. 

When there is too much borrowing relative to what the economy can sustain, there can be financial bubbles leading to, for example, a housing crisis, he said. Those who are lower-income are the most vulnerable because they risk having their homes foreclosed on, Schipper said.