How the Fed Sets Rates: IORB, Reverse Repos and the Range

On 16 September 2026, the Federal Reserve raised its target for the Federal Funds Rate to a range of 3.75% to 4%. The next morning, the rate banks paid each other for overnight loans rose from 3.63% to 3.88%. It has been 3.88% on every business day since.

To get there, the Fed changed a handful of rates of its own. The market rate moved with them. Here is how the Fed sets interest rates, starting with the interest it pays on bank reserves.

The Federal Open Market Committee (FOMC) sets US interest rates at eight meetings a year. We cover who sits on it in What Does the Fed Do?

Its decision is a target range for the Federal Funds Rate, 0.25 points wide. The Federal Funds Rate is what banks pay to borrow reserves from each other overnight, with no collateral. The rate actually paid is called the Effective Fed Funds Rate. We explain how it is measured in What Is the Fed Funds Rate?

Before December 2008, the Fed set a single target number. It hit that number by adding or draining reserves each day, so that their price moved to the target. The bond buying that began in the 2008 crisis left banks with far more reserves than they needed. Small daily changes in supply no longer moved the price.

So the Fed now steers the rate with prices it sets itself. In January 2019, the FOMC said it would keep working this way. It would hold "an ample supply of reserves" and control short-term rates "primarily through the setting of the Federal Reserve's administered rates."

Reserves are the money banks keep in their accounts at the Fed. On 30 September 2026, banks held $2.95 trillion of them.

The Fed pays interest on those balances. The rate is called IORB. It has been 3.90% since 17 September 2026.

IORB pulls the market rate towards it. A bank can earn 3.90% with no risk by leaving cash at the Fed. So it has little reason to lend reserves to another bank for much less. When the Fed raises IORB, the market rate rises with it.

The market rate sits a little below IORB, at 3.88%. Some lenders in the Federal Funds market are not banks. They are mainly government-sponsored enterprises, which cannot earn IORB. They lend to banks for slightly less.

The Fed has paid interest on reserves since 9 October 2008. A 2006 law allowed it from October 2011. A 2008 law brought the date forward.

At first there were two rates, one for required reserves and one for excess reserves. On 29 July 2021, they became the single IORB rate.

A repo is an overnight loan of cash, backed by bonds as collateral. We explain it in What Is the Repo Market?

In the Fed's Overnight Reverse Repo Facility (ON RRP), firms such as money market funds lend cash to the Fed overnight. They hold Treasury bonds as collateral. Most of these firms cannot hold reserves, so they cannot earn IORB.

The ON RRP rate is 3.75%, the bottom of the range. A fund has no reason to lend cash elsewhere for less than the Fed pays. That puts a floor under overnight rates.

Use of the facility peaked at $2.55 trillion on 30 December 2022. On 2 October 2026, it was $1.5 billion. Market rates sit above the floor, so funds lend their cash elsewhere.

Two facilities sit at the top of the range. Both charge 4.00%:

A firm that can borrow from the Fed at 4% has little reason to pay much more elsewhere. That caps overnight rates near the top of the range.

The chart shows all of these rates on 1 October 2026. The Effective Fed Funds Rate of 3.88% sits 0.02 points below IORB. It is 0.13 points above the bottom of the range.

Since the Fed moved to a target range in December 2008, the Effective Fed Funds Rate has been outside it on two days:

The Fed responded in 2019 with daily cash loans to the repo market. In July 2021, it set up the Standing Repo Facility as a permanent backstop.

Each FOMC statement comes with an implementation note. It lists the new settings for every tool. On 16 September 2026, the note raised each rate by 0.25 points, effective the next day:

The changes then spread. The Effective Fed Funds Rate moved to 3.88% on 17 September. The Prime Rate, which US banks use to price many loans, rose from 6.75% to 7.00% the same day. Bond yields respond too, as we show in Bond Prices and Yields.

Markets also try to guess the next move before it happens. We explain how in What Are Fed Funds Futures?

The Fed announces a range. It then sets the rate it pays on reserves, the rate it pays on reverse repos and the rates it lends at. Those four prices keep the market rate inside the range.

This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.

The same approach runs through everything else we publish:

Good places to start on the website:

DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.