How the Fed Implements Interest Rates: IORB, ON RRP and the Discount Window

The federal funds rate is the rate on unsecured overnight loans of reserve balances between eligible institutions. The FOMC announces a target range to communicate the desired level of this market rate as part of U.S. monetary policy. It does not set the rate on every overnight loan, bank deposit, credit card, mortgage, or Treasury security. Those prices are influenced by the policy framework, but also by credit risk, collateral, term, liquidity, competition, and expectations.

The [Federal Reserve's policy-rate overview]({source:fedPolicyRateOverview}) describes the target range as the FOMC's policy rate. The New York Fed's Markets Desk helps implement the Committee's directives, while the Board of Governors sets administered rates such as IORB. Keeping those roles distinct helps explain why a policy announcement can change several posted rates on the same effective date while private market rates still vary across instruments and counterparties.

The FOMC target range is a policy instruction, not a promise that every trade will occur inside two exact boundaries. The effective federal funds rate (EFFR) is a market statistic calculated from overnight transactions. The difference between a target and an observed rate is not automatically evidence that policy has failed; it needs to be read alongside the rate-setting tools, market plumbing, and the transactions included in the measure.

Banks and other eligible depository institutions hold reserve balances in accounts at Federal Reserve Banks. The Board sets IORB, the interest rate paid on eligible balances. A bank deciding whether to lend overnight funds to another institution weighs that possible return against the safety and convenience of keeping funds in its Fed account. That opportunity cost helps put upward pressure on the rates at which banks are willing to lend.

IORB is not an interest rate that a household can earn by opening an account at the Federal Reserve. A bank may choose its own deposit rates for customers, taking account of its funding needs, competition, operating costs, and other risks. IORB can influence banks' alternatives and short-term funding conditions, but there is no fixed one-for-one pass-through to a household's savings account or borrowing rate. The [Fed's IORB FAQ]({source:fedIorbFaq}) explains who earns the rate and why it is central to rate control in an ample-reserves framework.

IORB also does not mean that banks can lend their reserve balances directly to households. Reserves are balances used by eligible institutions and for settlement within the banking system. A bank loan and a reserve transfer are different balance-sheet events. The rate is a tool for guiding overnight market conditions, while credit decisions still depend on borrowers, bank balance sheets, and demand.

Not every important money-market investor can earn IORB. The New York Fed's ON RRP facility gives approved counterparties, including money-market funds and government-sponsored enterprises, an overnight investment option with the Federal Reserve. In a reverse repo, the Desk transfers Treasury securities to a counterparty and agrees to buy them back the next business day at a price that reflects the offering rate. The operation temporarily absorbs cash from that counterparty.

Because the facility is available to eligible nonbank investors, it can limit pressure for them to lend cash at a lower overnight rate elsewhere. In that way, ON RRP works alongside IORB to help support a floor under overnight money-market rates. It is a policy implementation facility with defined counterparties and collateral; it is not a retail account, a general guarantee for money-market funds, or the same trade as every private repo transaction. The [New York Fed's overview of repo and reverse repo operations]({source:nyFedRepoReverseRepo}) describes ON RRP and the separate Standing Repo Facility.

ON RRP should not be confused with the Standing Repo Facility (SRF). In ON RRP, approved counterparties place cash with the Fed against Treasury collateral, absorbing cash overnight. Under the SRF, eligible counterparties provide eligible securities and receive cash from the Fed, supplying liquidity. The two operations act in different directions and support distinct parts of monetary-policy implementation and market functioning.

The discount window lets eligible depository institutions borrow from their regional Federal Reserve Bank, subject to program terms and collateral requirements. The main program is primary credit, generally available to institutions in sound financial condition. The rate charged on primary credit is often called the primary credit rate or the primary discount rate. Other programs, including secondary and seasonal credit, have different eligibility and pricing, so the phrase “the discount rate” needs context.

The discount window is a direct source of liquidity for a bank that has arranged access and pledged eligible collateral. It is different from an unsecured federal funds loan between institutions and from IORB, which pays interest on reserves already held in an eligible account. The [Federal Reserve's discount-window page]({source:fedDiscountWindowRate}) explains the programs and how primary credit is set. Its published relationship to the FOMC's target range can change, so readers should check the current page instead of treating a past spread as permanent.

The New York Fed also operates the Standing Repo Facility, which lends cash against eligible securities to approved counterparties. That is not a discount-window loan: the institutions, legal transaction, collateral, and operating terms differ. Looking only at a quoted rate without identifying the facility can turn two different liquidity channels into one misleading “Fed rate.”

The EFFR is calculated from overnight federal funds transactions; it is not a rate the Board posts for all trades. The New York Fed publishes it as a volume-weighted median of the previous business day's transactions. A weighted median is not the same as a simple average, a quoted bank rate, or the FOMC's target midpoint. Check the measure's definition and reference date when comparing it with a policy announcement.

IORB is available to eligible depository institutions, while some lenders in the federal funds market cannot earn it. A bank may borrow from one of those lenders at a rate below IORB and still have an incentive to hold the proceeds as reserves, subject to balance-sheet costs and other constraints. ON RRP gives some nonbank institutions another option. Differences in access, balance-sheet capacity, payment timing, and competing investments help explain why market rates are guided by administered rates rather than mechanically pinned to one number.

The [New York Fed's monetary-policy implementation overview]({source:nyFedMonetaryPolicyImplementation}) explains how IORB, ON RRP, and market operations support control of the federal funds rate. These tools influence incentives and market alternatives. They do not force every participant to trade with the Fed or ensure identical borrowing costs across instruments.

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Suppose the FOMC announces a hypothetical target range of 4.00% to 4.25%. Assume, only for illustration, that the Board sets IORB at 4.15%, the ON RRP offering rate is 4.00%, primary credit is 4.25%, and the next published EFFR is 4.12%. Each figure answers a different question:

The EFFR in this example is inside the target range and below IORB. That is not an arithmetic contradiction: IORB applies to eligible reserve balances, while the EFFR summarizes transactions among a broader set of market participants. The example does not imply that the rates must keep these exact spreads, or that any value is current. Actual settings, participation, and transactions change over time.

Do not use these overnight policy rates as substitutes for a bank's advertised savings yield, a credit-card APR, a mortgage quote, or the yield on a Treasury security. Longer-term and customer rates reflect additional markets, terms, risks, and institution-specific pricing. Policy rates can influence them through financial conditions, but the effect can be incomplete and delayed.

The target range and administered rates first shape overnight funding alternatives. Market participants then price other short-term instruments using those rates, expectations about future policy, collateral, and their own funding conditions. A change can pass through to a variable-rate contract when its reference index resets, but the contract's index, spread, reset date, and any caps determine the customer's actual change. A 25-basis-point policy move does not promise a 25-basis-point change in a credit-card APR, a bank deposit rate, or every business loan.

Banks may adjust deposit rates by less than, more than, or later than a policy move as they balance funding needs and competition; economists study this behavior using measures such as deposit beta. Fixed-rate mortgages and longer-term business loans respond to longer-term market yields and credit spreads, which can move before an FOMC decision as expectations change. For the deposit channel, see how Fed changes reach bank deposit rates. To assess a specific loan, read its benchmark and reset terms instead of using IORB or the target range as a personal quote.

First identify which institution acted and which rate changed. The FOMC sets the target range; the Board sets IORB; the New York Fed offers rates for its market operations; and Reserve Bank boards set discount rates subject to Board review. The announcements may be coordinated, but the rates are not interchangeable. A report that says “the Fed raised rates” usually refers to a change in the target range and often related administered rates, but the specific release determines what changed.

Next check the effective date, not just the publication timestamp. Compare the policy setting with the EFFR observation for the correct business day. For ON RRP and repo facilities, check the operation's offering or minimum bid rate, counterparty rules, collateral, and results. For discount-window data, distinguish primary, secondary, and seasonal credit. This small amount of context prevents mixing a market outcome with a facility's posted terms.

Finally, separate implementation from economic effects. Administered rates help steer overnight money-market rates. Market rates then feed into other financing conditions, but changes in mortgage, business, or deposit rates depend on more than the overnight policy framework. For nearby topics, see how SOFR and EFFR differ, how the federal funds rate differs from prime, and how the Fed's balance sheet works.