Last time we talked about the Fed Discount Rate in Part I
Fed Discount Rate: This is the rate at which the Fed lends money to member banks for overnight loans. Yep you heard right "overnight" as in you got 24 hours to pay it back. This money is available so banks can keep the right amount of "reserves" in the bank. The Fed "dials in the Fed Discount Rate.. It directly controls it at will. Incidentally this rate is usually about 1% higher than the "Fed Funds Rate" which we'll talk about next.
Now let's continue with the next all important Fed Rate.
Fed Funds Rate: This is the rate at which banks lend each other money for overnight loans. The Fed sets the "target" for this rate, but since banks have other sources to borrow from, it's only influenced by the Fed. However, all banks set their prime rate based on the Fed Funds Rate. So if the Fed raises or lowers the Fed Funds rate, the Prime Rate will go up or down. This rate is usually 1% higher than the Fed Discount Rate.
We'll wrap this up in Part 3 and you'll be so equipped to explain this to your friends and clients, you'll be amazed -- and so will they.
Hope this helps,