Question

Compare and contrast the federal funds rate, the discount rate, and the prime rate. 4 sentence

Answer 1

The federal funds rate is the overnight interest rate at which depository institutions lend reserve balances to one another and is guided by the Fed’s target range to implement monetary policy. The discount rate is the interest the Federal Reserve charges banks for direct short-term loans from the discount window, typically set by the Fed and usually above the federal funds rate as a lender-of-last-resort backstop. The prime rate is the benchmark commercial banks charge their most creditworthy customers (and a reference for many consumer variable rates); it is set by banks but generally moves in step with the federal funds rate. In short, the federal funds rate is a market interbank rate influenced by Fed policy, the discount rate is a Fed-set backstop loan rate, and the prime rate is a bank-set retail lending benchmark that normally sits above the federal funds rate.