Fed Funds Rate vs. IORB & ON RRP
@EmilKalinowski had a great answer to this question. If no securities directly trade off the Fed Funds Rate, how does the Fed's policy rate influence the market? Let's unpack it together.
The Fed is also, at the same time, adjusting the interest on excess reserves rate and reverse repurchase agreement rate. These are what other short-term money market rates are reacting to.
— Emil (@EmilKalinowski) April 24, 2022
Hopefully Mr. @FedGuy12 will confirm and/or elaborate.
As @EmilKalinowski says, the Federal Reserve manages overnight interest rates by setting the interest on reserve balances (IORB) rate and also via their Overnight Reverse Repo (ON RRP) operations.
IORB is the rate paid to depository institutions on balances maintained at Federal Reserve Banks. In ON RRP, the Fed offers Treasuries from its balance sheet to eligible counterparties and agrees to buy them back at a premium of a pre-announced offering rate set by the FOMC.
With the Fed as the counterparty, both IORB rate and ON RRP offering rate are virtually risk-free. And the Fed updates these rates together with the Fed Funds Rate to affect the short-term money market rates.
And @FedGuy12 confirms Emil's take:
Yes that's right. Rates moves via changes IOR and RRP. Fed funds is dead and irrelevant.
— Joseph Wang (@FedGuy12) April 24, 2022
This was my second post for #ship30for30!