Discount Rate is the interest rate
that the Federal Reserve charges
member banks for loans. Banks use the
Discount Rate as the base for loans
made to their customers. The Discount
Rate is set by the Federal Reserve
Board which consists of seven members
appointed by the President of the
Discount Rate does not fluctuate on a
day-to-day basis like most other
interest rates. Instead, it only
changes when the Federal Reserve Board
feels it is necessary to influence the
economy. During recessionary times,
the Fed will ease interest rates to
promote borrowing and spending. During
inflationary times, the Fed will raise
interest rates to discourage borrowing
and spending, thereby slowing the rise
with excess reserves can lend their
reserves to banks with deficient
reserves at the Federal Funds Market.
The interest rate charged for these
short (often just overnight) loans is
called the Fed Funds Rate.
Prime Rate is the interest rate U.S.
banks charge their best corporate
clients. Changes in the Prime Rate are
almost always on the heels of a change
in the Discount Rate.