How Central Banks Set the Floor Rate

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Oct 22, 2026 · 9m · transcript

We explore why central banks no longer fight to control the exact quantity of money, but instead focus on setting a strict floor for interest rates. Using the Federal Reserve’s Overnight Reverse Repurchase Agreement facility as our anchor, we explain how this tool creates a risk-free return benchmark that stabilizes short-term lending across the financial system. Lucas and Luna break down the mechanics of the reverse repo market, why it became essential after the 2019 liquidity stress, and how it allows policymakers to keep rates in a target range without constantly buying or selling assets…