The interest on reserve balances (IORB) rate does not set a floor on
short-term interest rates. In fact, the effective federal funds rate is
frequently less than the IORB rate. A key reason is that not all
institutions eligible for accounts at the Fed earn interest.
Government-sponsored entities—Fannie Mae, Freddie Mac and the Federal
Home Loan Banks (FHLBs)—have accounts at the Fed that earn no interest.
So, these institutions are willing to lend funds to a depository
institution at an interest rate below the IORB rate but above zero. When
this transaction occurs it is called arbitrage, and this action brings
the federal funds rate close, but not equal, to the IORB rate.