You have no idea how complicated the Fed’s interest rates are!

1) Federal Funds Rate (FFR).

All the commercial banks in the Federal Reserve system, plus the 24 primary dealers who can trade directly with the Federal Reserve, the interest rate formed by the mutual borrowing of funds between them is called the Federal Funds Rate, which is the core inner ring of the entire dollar monetary system and the basis for the formation of all dollar interest rates, since the outbreak of the global financial crisis in 2008, the Federal Reserve usually keeps it in a narrow range, this interest rate Corridor, is the benchmark interest rate that we usually talk about the Federal Reserve to raise – lower interest rates.

2) Effective Federal Fund Rate (EFFR).

The New York branch of the Federal Reserve, based on the actual interest rate traded in the federal funds market on the previous day, the statistics and published to the community of the short-term Federal Reserve System weighted interest rate

3) IORR Rate, Interest on Required Reserves, the statutory reserve rate.

IOER Rate, Interest on Excess Reserves, Excess Reserve Rate

IORB Rate, Interest on Reserve Balances, the reserve rate

In 2006, the Federal Reserve was authorized to pay interest on bank reserves in the U.S. Financial Services Regulatory Relief Act, which was scheduled to take effect on October 1, 2011. However, after the outbreak of the subprime mortgage crisis, the effective date was advanced to October 1, 2008. Under this act, the Fed pays interest on statutory reserves and excess reserves (originally, like other Western countries, no interest is paid).

Effective July 29, 2021, both IOER and IORR, are replaced by the reserve rate, IORB.

Note that IORB is the upper limit of the Federal Reserve’s FFR corridor.


Because, if the FFR in the Fed system is higher than the IOER, then commercial banks and primary dealers, will not put money in the Fed, but will choose to lend to other commercial banks, so that the influx of funds into the federal funds lending market becomes more, will let the Fund Rate eventually or down to the IORB level.

In turn, if the Fed raises the reserve rate, it is raising the interest rate because it raises the upper limit of the FFR.

This cap was also set from the 2008 global financial crisis, because after the outbreak of the financial crisis, the Fed lowered interest rates to near zero and created sky-high reserves for major commercial banks through massive asset purchases. In order to manage the amount of base money released by QE, and at the same time regulate the interest rate range, the Fed has set a ceiling for the policy rate range by paying the reserve rate, which is equivalent to a ceiling.

In fact, this is exactly the reason why the federal funds rate corridor, as you can see, appeared in late 2008

4) ONRRP Rate, Overnight Reverse Repurchase Agreements Award Rate, Overnight Reverse Repo Rate.

On the Fed’s side, reverse repo means that the central bank sells marketable securities to counterparties such as banks to recycle funds in the market, and then agrees to repurchase the marketable securities from the counterparties at a specific date in the future – the so-called overnight reverse repo, that is, the funds I only use for one day.

This behavior, originally the Federal Reserve Open Market Operation (Open Market Operation, OMO) of a kind, mainly used to fine-tune the financial markets, and the interest rate paid by the Fed to counterparties, is ONRRP Rate.

This ONRRP is the lower limit of the Fed’s FFR corridor.


Because, if the FFR is lower than the Fed’s overnight reverse repo rate, the Fed can directly repatriate funds via overnight reverse repo, prompting the lower limit of interest rates to rise.

In the early hours of November 3, the Fed fixed the interest rate corridor at 3.75%-4.0%, meaning that the Fed will ensure that the federal funds rate stays within this narrow range through the operation of the IORB and ONRRP.

5) USD LIBOR (London Inter-Bank Offered Rate of USD), the London Inter-Bank Offered Rate of USD.

This is the so-called “overseas dollar rate”, mainly refers to the statistics of large overseas banks, in the unsecured money market lending dollar interest rate.

Specifically, what is commonly referred to as LIBOR includes overnight, 1-month and 3-month maturities.

In the decades since the inception of the offshore dollar, LIBOR has long served as the most widely used benchmark interest rate in international financial markets, with more than $400 trillion in financial contracts using U.S. dollar LIBOR as the reference benchmark rate.

However, since entering the 21st century, along with the dramatic expansion of the scale of global financial transactions, including the scale of unsecured currency borrowing and lending by large domestic and overseas commercial banks in the U.S., which accounts for a decreasing share compared to the scale of total financial transactions, is no longer sufficient to generate a robust and reliable benchmark interest rate.

More importantly, in the post-Basel III era of enhanced global financial regulation, which discourages banks from engaging in unsecured money market financing, interbank lending, negotiable large certificates of deposit (NCDs) and commercial paper (CPs) have continued to shrink in volume. In the absence of a large number of real transactions, banks submitting quotes to LIBOR administrators can only provide an estimate based on market observations, which also provides room for manipulation of LIBOR.

During the global financial crisis in 2007-2009, traders from some large commercial banks deliberately lowered the LIBOR quotes they submitted to make themselves appear more creditworthy by depressing LIBOR, and several cases of quote manipulation broke out, which seriously weakened the market credibility of LIBOR.

Subsequently, LIBOR management agencies carried out a series of reforms, but due to the overall substantial decline in the scale of international unsecured financing, the effect of reform was very limited, and the Federal Reserve decided to abandon LIBOR as the basis for pricing in the U.S. capital markets in 2017, but in the international financial markets, this rate is still widely used.

6) SOFR Secured Overnight Financing Rate.

SOFR and EFFR are both products of the U.S. domestic money market and together form the basic system of “federal funds market + repo market”. Among them, EFFR corresponds to the federal money fund market and SOFR corresponds to the bond-backed repo market.

Therefore, similar to LIBOR, SOFR has four maturities: overnight, 30-day, 90-day and 180-day.

After the financial crisis in 2008, under the strong regulation of various countries, financial institutions became more concerned about credit risk, and the financing channels of the money market began to change, and the main way gradually shifted from unsecured interbank lending to secured bond repo, and the market volume of SOFR, compared with EFFR, has an overwhelming advantage.


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