Where does the overnight rate actually live?

The overnight rate is the price of one specific thing: central bank reserves. To understand what moves that price, you have to know who can create reserves, who can destroy them, and who merely passes them around.

Reserves are the only settlement asset

A reserve balance is a bank's deposit at the central bank. It is the only asset with which banks settle obligations to each other with finality. Your deposit at a commercial bank is a claim on that bank; the bank's reserve balance is a claim on the central bank, and there is nothing above it.

Here is the fact that trips up most people: banks cannot change the total quantity of reserves. When Bank A lends reserves to Bank B, the reserves move — the total is unchanged. Lending, borrowing, and payments shuffle reserves between accounts. Only the central bank's own balance sheet changes the total.

The identity that governs the total

Read the central bank's balance sheet and the answer falls out. Assets equal liabilities:

securities and loans held = banknotes + reserves + the government's account + other liabilities + capital

Rearranged for what we care about:

reserves = assets − banknotes − government account − other liabilities − capital

Every item on the right is a claim competing with banks for the same balance sheet. That produces a genuinely counter-intuitive consequence: reserves fall for reasons that have nothing to do with monetary policy.

A worked example

Take a rounded, illustrative central bank balance sheet (in trillions):

• Assets: 8.00
• Banknotes in circulation: 2.30
• Government's account at the central bank: 0.80
• Overnight reverse repo facility (cash parked by money funds): 0.40
• Capital and other: 0.05

Reserves = 8.00 − 2.30 − 0.80 − 0.40 − 0.05 = 4.45 trillion.

Now a quarterly tax date arrives. Companies and households pay $200 billion to the government. That money leaves bank deposits, moves into the government's account, and reserves fall to 4.25 trillion — a $200 billion drain, with no policy decision, no announcement, and no change in the central bank's assets at all. Banknote demand at Christmas does the same thing more slowly. Money funds shifting cash into the reverse repo facility do it again.

Why the level matters

Demand for reserves is not a straight line. Above a certain level, banks have all they need and extra reserves do nothing to the overnight rate. Below it, reserves become genuinely scarce and the rate climbs steeply — the demand curve has a flat stretch and then a wall. Where the wall sits is a function of regulation, payment volumes, and how comfortable each bank wants to feel, and it moves over time. Nobody, including the central bank, knows the exact number in advance. Unit 2 closes with a well-documented episode in which the wall was found the hard way.

Try it now

1. The table below shows the policy rates of three central banks on 24 September 2026. Pick your currency and note the level its central bank was targeting that day. For the Fed, say whether you are quoting one number or two.

2. Below is the secured overnight rate minus the bottom of the Fed's target range, on twenty-one days picked from the six months to 24 September 2026, every month-end among them.

3. Mark the month-ends and quarter-ends on that series. Describe what you see in one neutral sentence, without inferring anything about what comes next.