Frequently Asked Questions

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• Interest on Reserve Balances (IORB): The Fed pays interest on the reserve balances held by banks at the Federal Reserve. This tool helps control the federal funds rate by incentivizing banks to lend or hold reserves.
• Overnight Reverse Repurchase Agreements (ON RRP): This tool allows the Fed to sell securities to eligible financial institutions with an agreement to repurchase them the next day. It sets a floor under short-term interest rates.
• Standing Repo Facility (SRF): Provides short-term liquidity to primary dealers and eligible depository institutions by offering overnight loans secured by Treasury securities and other high-quality collateral.
• Discount Window: Modernized to offer broader access and encourage borrowing to maintain liquidity during financial stress.
• Quantitative Easing (QE) and Quantitative Tightening (QT): The Fed buys or sells long-term securities to influence interest rates and support economic growth or control inflation.

• By adjusting IORB and ON RRP rates, the Fed influences the federal funds rate, which serves as a benchmark for other interest rates, including loans and mortgages.
• SRF and the discount window ensure liquidity in the banking system, reducing the risk of financial disruptions.
• QE and QT help manage economic cycles by injecting or withdrawing liquidity, impacting long-term interest rates and economic activity.

• After the 2008 financial crisis, the traditional tool of setting the federal funds rate alone became insufficient due to large excess reserves in the banking system. New tools were designed to provide additional flexibility and precision in managing monetary policy.

• IORB: Targets reserves held by banks at the Fed and influences the federal funds rate by setting the upper limit.
• ON RRP: Targets non-bank financial institutions (e.g., money market funds) and sets a floor under short-term interest rates.

The magic number is 19.