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How Central Banks Set Interest Rates on Reserves
Description
In this episode of Monetary Policy Explained with Fexingo, Lucas and Luna break down the mechanics of how central banks actually set the interest rate they pay on commercial bank reserves. Using the Federal Reserve's IORB rate as a concrete example, they explain why this tool became dominant after 2008, how it creates a floor for short-term rates, and what happens when the Fed adjusts IORB by 25 basis points. They also discuss the current debate about whether the Fed should narrow the gap between IORB and the overnight reverse repo rate. If you've ever wondered why the Fed pays banks interest on reserves, and how that translates into the rates you see on savings accounts or mortgages, this episode gives you the specific mechanism. Recorded June 10, 2026.