I am trying to understand how the target FFR set by the FOMC is actually realised in the overnight lending market. That is, by what mechanism does the market driven overnight lending rate converge to the target FFR set by the Fed?
This source seems to indicate that it is open market operations that primarily drive the market rate. I think this makes sense, it seems this directly alters the available pool of reserves, so supply and demand factors start to weigh on the realised overnight lending rate.
This source on the other hand indicates that the primary mechanism the Fed uses to indirectly change the market rate is via the IORB and ON RRP. This also makes sense to me, but I think for a slightly different reason; I suppose with the IORB (and effectively with the IORB), banks would not want to lend to other banks at any rate lower than the IORB, and so this is a clear mechanism which influences the market rate to lying within the target band set by the Fed.
Which of these is the principal driver for getting market rates to fall in line with the FFR? I could see why both in tandem might work, but then why would the Fed be willing to pay interest on reserves, if it can achieve the same monetary policy effect by just controlling the supply and demand of reserves? I.e, couldn't they avoid paying any form of interest on reserves, and purely control liquidity via open market ops?