It stands for interest on excess reserves; an administered interest rate and a central bank’s (Fed Reserve’s) tool that used to control short-term interest rates. It is a monetary policy tool whereby a central bank sets a limit (lower bound) on interest paid on deposits in the banking system. In the past, the Fed did not pay banks any interest on the extra reserves maintained in their accounts at the Fed (central bank reserves). Beginning in 2008, the Fed started paying interest in the form of interest on excess reserves (IOER).

The IOER effectively places a floor under the short-term interest rate that banks charge each other for excess reserves borrowed on an inter-bank basis. Banks can deposit their excess reserves at the Fed, and receive the IOER. No bank would lend money to another bank at a rate lower than this rate.

The interest rate on excess reserves (IOER) and the interest rate on required reserves (IORR) were replaced with a single rate known as the interest rate on reserve balances (IORB). The interest rate on reserve balances (IORB rate) is the rate of interest that the Federal Reserve pays on balances maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks.