How IORB and the Effective Federal Funds Rate Differ
Summary
This explanation distinguishes the Federal Reserve’s administered interest rate on reserve balances (IORB) from the effective federal funds rate (EFFR), a rate observed in overnight lending markets. IORB is paid on reserve balances held by eligible institutions at Federal Reserve Banks. The EFFR reflects overnight borrowing and lending of reserve balances among depository institutions and Federal Home Loan Banks; it is not directly set by the Fed.
The Federal Open Market Committee sets a target range for the federal funds rate and uses administered rates to help keep the market EFFR within that range. IORB is the primary tool described, while the overnight reverse repurchase facility’s offering rate provides a supplementary influence for eligible institutions placing funds overnight against collateral. The difference between IORB and EFFR can therefore reflect how these policy tools interact with market participants and access to facilities. The explanation gives institutional context rather than a quantitative account of the spread, and notes that the facility’s influence has caveats. The quoted rate levels are a dated snapshot, not a general rule.
Key ideas
- IORB is an administered rate paid on eligible institutions’ reserve balances at the Federal Reserve.
- The effective federal funds rate is observed in overnight reserve lending markets.
- The FOMC sets a target range for the federal funds rate rather than directly setting the EFFR.
- IORB and the overnight reverse repurchase offering rate help guide the EFFR toward the target range.
- Differences between administered and market rates depend on market structure and facility access.
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Full text
# Difference between US FED interest on reserve and EFFR? # Difference between US FED interest on reserve and EFFR? Can anyone explain the difference between THE US Federal reserve interest on reserve balances (IRRBIOER) and effective fed funds rate (EFFR)? IRRBIOER is currently at 0.9% and EFFR 0.83%. There seems to be a spread and I am unsure why: ## Answer by Dimitri Vulis (score 4, accepted) https://quant.stackexchange.com/a/71115 According to https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210602a.htm , July 29, 2021, the previously separate interest rate on excess reserves and the interest rate on required reserves were replaced with a single rate, the interest rate on reserve balances (IORB), which the Federal Reserve pays on balances maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks. The Fed sets the IORB rate. Further, many large financial institutions, many of which don't have access to interest on deposits, can place deposit funds at the Fed overnight, with a security held as collateral, in the overnight reverse repurchase agreement (ON RRP) facility. The Fed sets the ON RRP offering rate which, some some caveats, determines how much this facility pays. The Fed funds rate (FFR) is the interest rate at which depository institutions and Federal Home Loan Banks borrow and lend reserve balances to each other overnight. The effective FFR is observed in the market. Federal Open Market Committee (FOMC) sets the monetary policy by adjusting the target range for the FFR (upper and lower bounds). FOMC then uses the above two "administered" rates - primarily IORB, and supplementally the ON RRP offering rate, to keep the effective FFR within the Fed's target range for FFR. Here is a blog entry https://libertystreeteconomics.newyorkfed.org/2022/01/how-the-fed-adjusts-the-fed-funds-rate-within-its-target-range/ from January 2022 that discusses he spread between the EFFR and the IORB among other things.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.