The Federal Reserve sets two key interest rates: the fed funds rate and the discount rate. The fed funds rate is the interest rate at which banks can lend money to one another overnight, while the discount rate is the interest rate at which the Federal Reserve lends money to banks. The main difference between these two rates is who they apply to. The fed funds rate applies to overnight loans between banks, while the discount rate applies to loans from the Federal Reserve to banks. The Fed uses the discount rate as a tool to manage the money supply and control inflation, while the fed funds rate is a benchmark for other interest rates in the economy.

The federal funds rate is the interest rate banks charge each other for overnight loans to meet reserve requirements. It is set by the Federal Open Market Committee (FOMC) and influenced by market conditions.

The discount rate is the interest rate the Federal Reserve charges banks for borrowing directly from its discount window, usually as a last resort. It is set by the Fed’s Board of Governors and is typically higher than the fed funds rate to encourage banks to borrow from each other first.

While the fed funds rate affects broader market interest rates (like loans and mortgages), the discount rate serves as an emergency funding tool. Both are key monetary policy tools used to control liquidity and economic activity.