Different interest rates are involved in the monetary policy process: The federal funds rate (FFR) gets most of the news headlines, but deeper reporting refers to the interest rate on reserve balances (IORB) and the discount rate, as well as something called the overnight reverse repurchase agreement (ON RRP) rate. At first glance, the relationship among these rates might be difficult to parse; so let’s take a moment to sort it out.

The target range for the effective FFR is set by the FOMC, while other rates tend to be determined by market forces. Rather than set an exact number, the FOMC sets a range and aims to keep the effective FFR in that range.

To help maintain the rate in this target range, the Board of Governors sets the IORB rate and the FOMC sets the ON RRP Rate to nudge the FFR up or down within the range. More information on these rates can be found in this FRED Blog post by Jane Ihrig and Scott Wolla.

The Discount Window is a facility through which banks can borrow directly from the Fed—typically as a last resort for banks that weren’t able to borrow from other banks or had insufficient cash on hand. The primary credit rate (often referred to as the discount rate) is the rate banks pay for borrowing from the Fed, a rate set by each Bank’s board of directors. It’s unlikely banks would borrow at higher market rates if they could borrow from their Federal Reserve Bank, which makes the discount rate an effective ceiling on the FFR target range.

The ON RRP rate, on the other hand, serves as a floor for the FFR as financial institutions (theoretically) wouldn’t lend funds for a rate below the ON RRP rate, since they would be able to earn a higher and risk-free interest by putting their money at the Federal Reserve instead of loaning it out. The above FRED shows that the FFR stays between the discount rate and the ON RRP.

Find more information on the relationship between these tools in this Page One Economics essay also by Jane Ihrig and Scott Wolla.

How this graph was created: Search FRED for federal funds rate and select the daily federal funds effective rate series. From the “Edit Graph” panel, search for and select “IORB.” Repeat for “Overnight Reverse Repurchase Agreements Award Rate” and “Discount Window Primary Credit Rate.” Restrict the date range to the past year.

Suggested by Jack Fuller and Nathan Jefferson.