The economy was still in a slump when rates were cut to zero. In an effort to stimulate growth, the Fed bought long-term bonds and pumped $4 trillion into the banking system. Now, with this significant amount of money already floating around, banks do not need to borrow from each other in the federal funds market because they have enough money of their own.
To solve this problem, the Fed pays banks interest on excess reserves, which induces banks not to lend and keep their money on account at the Fed. Therefore, loans have to be at a rate above what the Fed is paying banks not to lend.
The timing of the next rate hike is speculative, but it is expected to be between 0.25 and 0.50 percentage points (25 and 50 basis points). The Fed is not sure it can hit an exact target, so it keeps the funds rate in a range and aims for the midpoint. If the central bank does keep rates at zero after meeting this week, it could leave some wondering if a rate increase will ever come.
—Reported by CNBC's Steve Liesman and written by Krysia Lenzo.