Discount Rate.
In plain English
The discount rate is the rate the Fed charges commercial banks that borrow short-term funds directly from it through what is called the discount window. It is a backstop source of cash for banks that need it, and it sits a bit above the Fed's main policy rate. When the Fed changes the discount rate, it signals the direction of its policy and affects the cost of credit in the banking system. The term is also used more broadly in finance to mean the rate used to translate future money into today's value.
01Why it matters
The discount rate is one of the Fed's levers on the cost of money, and changes in it ripple into the rates banks charge their own customers.
02The math, step by step
The Fed raises the discount rate along with its main policy rate. Banks face higher costs to borrow from the Fed, and they pass some of that on through higher loan rates.
03What this is NOT
The discount rate is NOT the federal funds rate. The discount rate is what banks pay to borrow from the Fed directly; the federal funds rate is what banks charge each other and is the Fed's main policy target.