The federal funds rate is the interest rate at which depository institutions lend to each other overnight to meet reserve requirements. On the other hand, the discount rate is the interest rate charged to depository institutions when they borrow funds from the Federal Reserve. Lastly, the prime rate is the interest rate that commercial banks charge their most creditworthy customers. Although all three rates influence borrowing costs, the federal funds rate is determined by market conditions, while the discount rate and prime rate are set by the Federal Reserve and commercial banks respectively.
