How Central Banks Set Interest Rates on Reserves

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Jun 10, 2026 · 7m · transcript

In this episode of Monetary Policy Explained with Fexingo, Lucas and Luna break down the mechanics of how central banks actually set the interest rate they pay on commercial bank reserves. Using the Federal Reserve's IORB rate as a concrete example, they explain why this tool became dominant after 2008, how it creates a floor for short-term rates, and what happens when the Fed adjusts IORB by 25 basis points. They also discuss the current debate about whether the Fed should narrow the gap between IORB and the overnight reverse repo rate. If you've ever wondered why the Fed pays…