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:

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1 Answer 1


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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    $\begingroup$ Thank you for your reply Dimitri, I have marked as answer. I will add for future readers: FED sets target range. IRRBIOER is the rate the FED pays to banks member of the FED). Non-banks (MM lenders, FHLBs, funds, ..) cannot get IRRBIOER as they are not members, and if there is a lot of liquidity they tend to lower the rate at which they lend cash. So the FED uses ON RRP with those non-banks to act as a floor (they prefer to lend to the FED at a higher rate than lowering their rate). EFFR is kept within target range by adjusting IRRBIOER (for banks) and ON RRP (for non-banks) $\endgroup$
    – tweedi
    Commented Jun 13, 2022 at 10:53
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    $\begingroup$ Thank you! Please note that the Fed tried for a few years to pay different interest on rquired and on excess reserve balances, but ended this distinction in July 2021, so there is no more IOER, only IORB. fred.stlouisfed.org/series/IOER "Interest Rate on Excess Reserves (DISCONTINUED) (IOER) - This series will no longer be updated. More information is available in the notes below the graph. This series has been replaced with the IORB. fred.stlouisfed.org/series/IORB" $\endgroup$ Commented Jun 13, 2022 at 11:26

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