Question

-Today, the reverse repo rate is the floor for the fed funds rate. Why?

-Today, interest on reserves is the ceiling for the fed funds rate. Why?

Answer 1

Price floor is the minimum price whereas price ceiling the maximum price charged

Since the Fed funds rate is the rate which is charged by the financial institutions when they lend money to other institutions overnight and the interest on reserves is the interest paid by the FED on the reserves held by banks.

Suppose the Reverse repo rate is 0.25 % and the interest on reserves is 0.50%

So,in this case the the federal funds rate would be targeted between 0.25-0.50 percent

Because if the Fed funds rate went below the interest paid on reserves then no bank would lend to another bank as it can get a higher return by lending to the Fed whereas if the federal funds rate above the reverse repo rate then the financial institutions can borrow funds from the Fed more cheaply as compared to from other institutions.