The federal funds rate is the interest rate at which banks lend money to each other overnight to meet their reserve requirements. The discount rate is the interest rate at which banks can borrow money directly from the Federal Reserve to meet their short-term liquidity needs. The prime rate is the interest rate that banks charge their most creditworthy customers and is typically used as a benchmark for other interest rates. While the federal funds rate and discount rate are set by the Federal Reserve, the prime rate is set by individual banks based on factors such as the federal funds rate and their own cost of funding.
