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One announcement, several rates

A statement that the Federal Open Market Committee raised or cut interest rates is really a statement about a target range: a band, a quarter of a percentage point wide, that the Committee sets for the federal funds rate. Banks lend each other reserves overnight within that band, but nothing forces them to land inside it on its own.

Why one rate needs several rates behind it

The target range is a goal, not a lever. To keep the overnight market trading inside it, the Federal Reserve operates a handful of rates it controls directly, and each does a distinct job: one sets a floor beneath which a bank has no reason to lend, another mops up excess cash overnight, and another exists as a backstop for banks that cannot borrow anywhere else. Reading a policy statement without knowing which rate is doing which job leaves the arithmetic underneath it invisible.

Where the difference matters to a reader

The rate the FOMC announces is not the rate that shows up on a savings account or a variable loan. What moves is one of the administered rates behind it, and how far that movement travels into an actual bank product depends on competition and balance-sheet decisions the central bank does not control. Seeing the target range as one rate among several is what makes a statement like What a Rate Decision Does to a Payment, and What It Actually Did make sense, since the size of the pass-through is exactly the gap between the announced range and the rate a bank actually offers.

How the pieces connect

How the four rates fit together

These are not four separate decisions. The Federal Open Market Committee sets one target range for the federal funds rate, and then keeps the actual overnight market rate inside that range using three rates it administers itself, each doing a distinct piece of the work.

  1. The target range

    The Federal Open Market Committee sets a target range for the federal funds rate, the rate banks charge one another for overnight loans of reserves. It sets a range, because keeping the market rate inside that band is left to the rates described below.

    The range is announced in the post-meeting statement and repeated in the FOMC implementation note, released the same day.

  2. The rate on reserve balances

    Interest on Reserve Balances (IORB) is what the Federal Reserve pays banks on the money they hold in their own accounts at the Fed. A bank that can earn IORB risk-free has little reason to lend to another bank overnight for less, so the rate anchors the market rate near the top of the range.

    IORB is one of the administered rates written into the FOMC implementation note, alongside the date it takes effect.

  3. The overnight reverse repo rate

    The overnight reverse repo rate is what the Fed pays money market funds and other approved lenders for parking cash with it overnight against Treasury securities as collateral. Because these lenders can always get that rate directly from the Fed, they have little reason to accept less anywhere else, which puts a floor under the market rate from below.

    The overnight reverse repo rate (ON RRP) sits in the same implementation note as IORB, with the same effective date.

    A bank with spare reserves

    can lend them overnight to another bank at a rate close to IORB.

    A money market fund without access to IORB

    can instead place cash at the ON RRP facility and earn that rate.

  4. The discount rate

    The discount rate is what the Federal Reserve charges banks that borrow directly from it, usually as a backstop. It sits above the target range, so borrowing straight from the Fed costs more than borrowing from another bank in the ordinary overnight market.

    The discount rate is the fourth administered rate listed in the implementation note, each rate carrying the date it takes effect.

All four rates change on the same day the target range does, because they are set to move together.

Which rate actually reaches your account

The Federal Open Market Committee moves a target range for the federal funds rate, the rate banks charge each other overnight for reserves. What lands in your savings account or your mortgage statement is a separate decision, made by your own bank, and the two rarely move together in equal steps.

Your bank is pricing its own funding.

A bank sets what it pays savers and what it charges borrowers by weighing its funding costs, its competition for deposits, and how much it wants to grow or shrink its loan book. The Interest on Reserve Balances (IORB) that the Federal Reserve pays banks on the reserves they hold with it sets a floor under what a bank can earn overnight without doing anything at all, and that floor shapes the starting point for its own pricing decisions. But the bank still has to decide how much of a change to pass on, to whom, and how quickly.

Why the pass-through is never one-for-one

A savings account rate typically moves less than the policy rate, and often more slowly, because banks are not required to pass a rate change straight through to depositors. A variable mortgage or a credit card balance can move closer to the full amount, because those contracts are often written to track a reference rate directly. The gap between the two is not a flaw in the system: it is the bank's own margin, adjusted by how much it wants your deposit or your business right now.

Checking what actually happened

The arithmetic of a quarter-point move against a mortgage, a card balance, and a savings balance, set alongside what pass-through has actually looked like historically, is worked through step by step on What a Rate Decision Does to a Payment, and What It Actually Did. The terms used here, including IORB and the federal funds target range, are also defined in the Central Banking Glossary, each with the published document where the term appears.

Where each rate is published

The Federal Open Market Committee does not leave its administered rates to be inferred from the policy statement alone. Alongside the statement, it releases a short document called the implementation note, and this is where the actual settings live: the interest rate paid on reserve balances (IORB), the rate offered on the overnight reverse repo facility (ON RRP), and the discount rate charged at the primary credit window. Each is written down with the level it has been set to and the date that level takes effect.

Why the note exists separately from the statement

The policy statement announces the target range for the federal funds rate, the range the Committee has agreed on. It does not, by itself, tell a bank what it will actually earn overnight or what it will be charged to borrow. The implementation note is the operating instruction that follows: it tells the Federal Reserve Bank of New York's trading desk, and the banking system, exactly where each administered rate sits inside or around that range.

Finding it yourself

  • Go to the Federal Reserve Board's own site.
  • Look for the press release accompanying the FOMC statement; the implementation note is published alongside it on the same day.
  • Read the note itself: it lists IORB, the ON RRP rate, and the discount rate individually, each with its effective date.

Reading the note directly is worth the extra step, because a news summary usually reports only the target range and leaves out the rate that actually determines what a bank earns on its reserves. The guide to reading a central bank's own words walks through the statement, the note, and the minutes in sequence, and the glossary explains each rate's abbreviation the first time you meet it. For how the Committee that signs off on these settings is actually organised, see who decides what at the Federal Reserve.

Questions about the Fed's several rates

Why does one Fed decision seem to move several different rates at once?

The Federal Open Market Committee (FOMC) sets a target range for the federal funds rate, the rate banks charge each other for overnight loans, but that range is only a target. To keep the actual market rate inside it, the Federal Reserve adjusts a small set of rates it controls directly, chief among them the rate it pays banks on the money they hold in accounts with it. When a headline says the Fed raised rates, it means the target range moved and these administered rates moved with it, in the same announcement.

What is IORB and why does it do more work than the target range itself?

Interest on Reserve Balances (IORB) is the rate the Federal Reserve pays banks on reserves they hold overnight in their accounts with it. Because a bank can always earn that rate risk-free, it has little reason to lend to another bank for less, so IORB effectively sets the floor under the federal funds rate. The target range gives the boundaries the FOMC wants; IORB is the tool that keeps the market rate from sinking below them.

What does the overnight reverse repo rate actually do?

The overnight reverse repo rate (ON RRP) is the rate the Federal Reserve pays a wider group of lenders, including money market funds, that cannot hold reserve balances the way banks do. It sets a second floor for that part of the market, so that cash outside the banking system has nowhere lower to go overnight either. Between IORB and the ON RRP rate, the Fed narrows the range in which short-term borrowing actually settles.

What is the discount rate, and is it the same thing as the federal funds rate?

The discount rate is the rate the Federal Reserve charges banks that borrow directly from it at the discount window, usually as a last resort. It sits above the federal funds target range and acts as a ceiling, discouraging banks from relying on the Fed. It is set separately from the target range, though it is announced alongside it in the same implementation note.

If the Fed cuts its rate, why doesn't my savings or mortgage rate move by the same amount?

The rates the Fed sets apply to banks and other institutions dealing with each other overnight, not to the rate a bank offers a saver or a borrower directly. Banks factor in their own funding costs, competition and margins before changing what they pay or charge, so the pass-through is rarely one-for-one and rarely immediate. The arithmetic behind that gap, worked through on a mortgage, a card balance and a savings balance, is set out on /rate-decision-arithmetic.html.

Where are these rates actually written down?

Each administered rate, IORB, the ON RRP rate and the discount rate, is set out in the FOMC implementation note published alongside every policy statement, with the date each rate takes effect. Reading that note directly shows exactly what changed and when. A guide to finding and reading it is at /how-to-read-central-bank-documents.html.