Interest on Excess Reserves, or IOER, was the rate the Federal Reserve paid commercial banks on funds they kept at regional Reserve Banks above their required minimum. It controlled interest rates by giving banks a guaranteed return at the central bank, so no bank had reason to lend overnight to another bank for less than the Fed was paying them to sit still. That floor pulled the federal funds rate, and every short-term rate tied to it, wherever the Fed wanted them to go. Since July 2021, IOER has been replaced by a single unified rate called Interest on Reserve Balances (IORB), currently set at 3.65 percent as of December 2025.1Federal Reserve Board. Interest on Reserve Balances The mechanism is the same; only the name and the scope changed.
What IOER Was and Why It Became IORB
From 2008 to 2021, the Fed ran two rates in parallel. The Interest Rate on Required Reserves (IORR) applied to the portion of a bank’s balance that satisfied its reserve requirement. The Interest Rate on Excess Reserves (IOER) applied to everything above that. In practice the two rates were almost always identical, but the split existed because IORR was designed specifically to offset the implicit tax that reserve requirements imposed on banks.2Federal Reserve Bank of St. Louis. Interest Rate on Excess Reserves (IOER Rate) (DISCONTINUED)
In March 2020, the Board reduced all reserve requirement ratios to zero.3Federal Reserve Board. Reserve Requirements With no required reserves, the distinction between “required” and “excess” balances stopped meaning anything. On July 29, 2021, the two rates were consolidated into a single Interest on Reserve Balances rate.4Federal Reserve Board. Interest on Reserve Balances Frequently Asked Questions The underlying statutory authority did not change. Regulation D (12 C.F.R. Part 204) still permits the Board to set the rate at a level not exceeding the general level of short-term interest rates.5eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions (Regulation D)
When someone asks about IOER today, they are almost always asking about IORB. The rest of this explanation uses whichever name fits the period being described.
How the Rate Steers the Federal Funds Rate
The federal funds rate is what banks charge each other for overnight loans. The Fed sets a target range for it, and IORB is the primary tool that keeps the actual market rate inside that range.
The logic is straightforward. If the Fed pays 3.65 percent on reserve balances, no bank will lend overnight to another bank for less than that without a reason. Why take on credit risk when the central bank offers a guaranteed return for the same money left in the same account? That makes IORB the effective ceiling of the fed funds market. In practice, the effective federal funds rate has consistently traded about 1 basis point below the IORB rate, a sign the tool is working as designed.6Federal Reserve. FOMC Minutes – April 29, 2026
When the Board of Governors raises or lowers IORB, the cost of overnight borrowing moves with it. That change ripples outward into mortgage rates, auto loans, credit cards, and savings yields.1Federal Reserve Board. Interest on Reserve Balances
Why the Arbitrage Between Banks and Non-Banks Matters
Not every institution with a Fed account earns IORB. Depository institutions do: commercial banks, mutual savings banks, savings banks, savings associations, federally insured credit unions, and certain trust companies, Edge Act corporations, and branches of foreign banks.7Federal Reserve Board. Section 19 – Bank Reserves Government-sponsored enterprises like the Federal Home Loan Banks hold accounts at the Fed but do not.8Office of the Law Revision Counsel. 12 USC 461 – Reserve Requirements
That exclusion is what keeps the system tightly anchored. Federal Home Loan Banks are the most active lenders in the overnight federal funds market, and because their cash earns nothing sitting at the Fed, they lend it out. They typically lend at about 7 basis points below IORB. Foreign banks operating in the U.S. are the main borrowers. They take those funds, deposit them at the Fed, and pocket the spread. Domestic banks could run the same trade, but FDIC assessment fees on their total assets make it less profitable for them.9Federal Reserve Board. The Recent Evolution of the Federal Funds Market The constant flow of borrowing and depositing keeps the effective fed funds rate glued to IORB without the Fed needing to step in daily.
The Reverse Repo Rate as the Partner Tool
IORB doesn’t work alone. The Fed also runs an overnight reverse repurchase agreement (ON RRP) facility, which serves institutions that can’t earn IORB. The ON RRP offering rate acts as a subfloor. Any eligible institution should refuse to invest overnight at a rate below what the Fed offers through that facility, just as any bank eligible for IORB should refuse to lend below IORB.10Federal Reserve Board. Overnight Reverse Repurchase Agreement Operations
Together, IORB and the ON RRP rate bracket the federal funds target range. IORB sets the upper boundary, ON RRP reinforces the lower one.
Why the Fed Needed This Tool
Congress first authorized interest payments on reserves in the Financial Services Regulatory Relief Act of 2006, with an original start date of October 1, 2011.11Federal Reserve. Annual Report 2006 – Monetary Policy Provisions The 2008 financial crisis pulled that timeline forward. The Emergency Economic Stabilization Act of 2008 moved the effective date up to October 1, 2008, handing the Fed a new tool at the moment it needed one.12Federal Reserve. Press Release – Board Announces That It Will Begin to Pay Interest on Reserves
Before that, the Fed controlled interest rates mainly through open market operations, buying and selling Treasury securities to adjust how much cash was floating around the banking system. That approach worked when reserves were scarce. After the massive reserve injections of 2008 and the quantitative easing programs that followed, reserves became so abundant that the scarcity-based method lost its grip. Paying interest on reserves gave the Fed a way to control rates regardless of how much cash banks were holding.
What Keeps the System Working in 2026
The whole IORB framework depends on reserves being abundant. If reserves ever became scarce enough that banks competed aggressively for overnight funding, the federal funds rate could push above IORB and the Fed’s primary rate-control mechanism would slip.
To prevent that, the Fed shifted course in early 2026 after years of quantitative tightening. It began purchasing shorter-term Treasury securities, mainly T-bills, to maintain what it calls an “ample supply of reserves.” The stability of the effective federal funds rate near IORB and the limited activity in the ON RRP facility both suggest reserves remained in that ample range through early 2026.6Federal Reserve. FOMC Minutes – April 29, 2026 As long as that holds, the rate the Fed pays on reserves will keep doing the work that IOER started doing in October 2008.