The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.

Question

Quizplus · Accepted Answer

The Fed's operating procedures involve setting a target federal funds rate and using open market operations to adjust the supply of reserves in order to hit that target rate. One tool they use to keep the federal funds rate within their desired range is paying interest on reserves (IOR), which creates a floor for short-term interest rates. The discount rate, set by the Fed as the interest rate at which banks can borrow from the discount window, serves as an upper bound for short-term rates. Therefore, the combination of IOR and the discount rate contains the federal funds rate within a range.

The Fed's Operating Procedures and Paying Interest on Reserves Contains