Interest on reserve balances.

In plain English

Interest on reserve balances sets a floor under short-term rates, because no bank lends overnight for less than it can earn risk free by leaving the money at the Fed. That makes it the Fed's primary steering tool in a system with large reserve balances, where adding or draining small amounts of cash no longer moves the market rate much. Raising the rate tightens policy without requiring the Fed to shrink its balance sheet, and lowering it eases policy the same way. The rate is administered by the Board of Governors, so the current figure comes from the Federal Reserve. Not every institution in the money market can earn it, which is why some rates trade slightly below the floor.

01Why it matters

This administered rate is the anchor that pulls savings yields, money market fund payouts, and short-term borrowing costs along with it, which is why a change here shows up in your bank statement within weeks.

02The math, step by step

Say a bank holds $5 billion at the Fed and the rate is 4 percent. That earns about $200 million a year, or roughly $555,000 a day. If another bank offers 3.8 percent for an overnight loan, the first bank declines, which is how the floor holds.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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