ZIRP, or "zero interest rate policy," is a macroeconomic term that refers to a situation where nominal interest rates are extremely low. This occurs when a country's central bank sets its short-term benchmark interest rates at 0%.

Considered an unconventional monetary policy tool, ZIRP is often linked to sluggish economic growth, deflation, and deleveraging. The primary aim of ZIRP is to stimulate economic activity by promoting low-cost borrowing and increasing access to affordable credit for both businesses and individuals.

Under ZIRP, the central bank maintains a nominal interest rate of 0%. This policy is significant in monetary policy discussions because it indicates that the central bank has reached the point where it can no longer lower nominal interest rates, known as the zero lower bound.

At this stage, conventional monetary policy has reached its maximum effectiveness in fostering growth. ZIRP is closely associated with the concept of a liquidity trap, which occurs when nominal interest rates cannot decrease further, even when savings surpass investment.

A liquidity trap arises when monetary policy loses its effectiveness due to very low-interest rates, coupled with consumers' preference to save rather than spend or invest in higher-yielding options. The main objective of ZIRP is similar to any period when a central bank is reducing interest rates: to stimulate economic growth and increase inflation by discouraging cash hoarding while encouraging lending, spending, and investment.

ZIRP signifies a crucial point because it implies that interest rates cannot be lowered any further, as the zero lower bound has been reached. The zero lower bound problem describes a scenario where the short-term nominal interest rate is at or just above zero, leading to a liquidity trap and restricting the central bank's ability to promote economic growth.

As a result, the onset of ZIRP is often viewed as a moment when central bankers have "run out of bullets," as their primary tool for managing monetary policy has effectively been rendered ineffective. In some cases, ZIRP has evolved into NIRP (Negative Interest Rate Policy).

On December 16, 2008, amid the Global Financial Crisis, then-chairman of the U.S. Federal Reserve, Ben Bernanke, announced that the central bank was lowering its benchmark target interest rate to nearly zero. This marked the first instance in U.S. history where the Fed had reduced interest rates to such a level, officially adopting a Zero Interest Rate Policy (ZIRP).

The Fed maintained rates near zero for approximately seven years, until 2015, when it determined that the economy was robust enough to gradually begin raising rates. Between 2015 and 2019, the Fed successfully increased short-term interest rates to as high as 2.5% from zero.

However, following the COVID-19 pandemic, all the progress made in raising interest rates back toward "normal" levels was undone. ZIRP was reinstated in the U.S. as a defensive measure aimed at shielding the American economy from adverse effects related to the ongoing global coronavirus crisis.