November 29, 2021

Corridor Versus Floor Operating Systems

“Although the Fed’s and the banks’ balance sheets have ballooned since the Great Recession, these reserves are less leveraged than they had been under the corridor system, because the IORB interest rate enables banks to earn income without lending.” ~ Robert F. Mulligan

Traditionally, the Fed adhered to a corridor operating system for managing interest rates and the money supply. This meant that the Fed attempted to set both upper and lower limits for a target interest rate. The interest rate targeted for this purpose was the Federal Funds rate, the interest rate Federal Reserve member banks charge each other for overnight loans. These loans are very low risk, because the loans expire in two weeks or less, and the money never leaves the Federal Reserve Bank where the reserves are held. These very short-term loans are called overnight loans, though they can extend up to two weeks, and can be rolled over indefinitely. The short duration of these loans helps minimize the risk to the lending banks. 

Figure 1. Selected U.S. Interest Rates 2004-2021

This article, Corridor Versus Floor Operating Systems, was originally published by the American Institute for Economic Research and appears here with permission. Please support their efforts.