Interest on Reserve Balances
The rate the Federal Reserve pays banks on the reserves they hold with it — the administered rate that anchors the floor of the US policy corridor for banks.
Also called: interest on reserves, IOER.
In a system with abundant reserves, the Fed cannot steer rates by making reserves scarce. Instead it sets the return on the safest asset a bank can hold, and lets competition do the rest: a bank will not lend overnight to anyone at less than it earns doing nothing.
IORB replaced the earlier split between interest on required reserves and interest on excess reserves in 2021, once reserve requirements had been set to zero and the distinction was moot.
It is an administered rate, not a market rate. The Board sets it directly, which is what makes it a lever rather than an observation.
The mechanics
- Who receives it
- Eligible depository institutions — banks — on their reserve balances.
- What it anchors
- The floor of the effective federal funds rate for institutions that can hold reserves.
- Why non-banks need more
- Money funds and GSEs cannot hold reserves, so the ON RRP facility reaches them instead.
The common misreading
That paying interest on reserves 'subsidises banks not to lend'. Lending is not constrained by reserves in the first place — IORB sets the opportunity cost of overnight money, which is how the policy rate transmits at all when reserves are abundant.
Related terms
- Overnight Reverse Repurchase Agreement FacilityA Federal Reserve facility where eligible non-banks lend cash to the Fed overnight against Treasury collateral, putting a hard floor under short-term interest rates.
- Bank reservesDeposits that commercial banks hold at the central bank — the settlement asset banks use to pay each other, and a liability of the central bank rather than an asset it owns.
- Secured Overnight Financing RateA broad measure of the cost of borrowing cash overnight secured by US Treasury collateral, published each morning by the New York Fed and the main US replacement for LIBOR.
- Deposit Facility RateThe rate the ECB pays euro-area banks on overnight deposits at the Eurosystem — since 2022 the rate through which the ECB steers short-term euro rates.
Primary sources
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