Episode Details
Back to Episodes
How Central Banks Use Interest on Excess Reserves as a Policy Rate
Description
Episode 53 of Monetary Policy Explained with Fexingo dives into the mechanics of interest on excess reserves (IOER) and its role as the de facto policy rate for the Federal Reserve since 2008. Lucas and Luna break down how IOER works, why the Fed uses a floor system, and how it differs from the old corridor system of the pre-2008 era. They discuss the September 2019 repo market spike, when the effective federal funds rate briefly rose above IOER, and explain the introduction of the overnight reverse repo facility (ON RRP) as a complementary tool. The episode also touches on how IOER affects bank lending, the money supply, and the transmission of monetary policy to the broader economy. Listeners learn why the Fed now controls short-term rates not through reserve scarcity but by setting a price on reserves.