When studying the economy, three interest rates control lending to banks, mortgages, and consumer loans. The three terms that often get confused are federal funds, prime, and discount interest rates, which helps with understanding SBA loans.
Anyone wanting to know how the economy works needs to know what the discount rate, the federal funds rate, and the prime rate are and why they are important.
What Is the Discount Rate?The discount rate is an interest rate the Federal Reserve charges for discount loans. This is the rate the Fed sets, so member banks can borrow money overnight if they need funding. The Fed sets the rate to allow banks to borrow so banks don’t fall below their mandated reserve levels.
The discount rate is also called the primary credit rate. The Federal Reserve sets this rate so banks…
