The Federal Reserve's discount rate is the interest rate charged to member banks when they borrow money from the Fed's discount window. The prime rate is the interest rate charged by banks to their most valuable customers. The prime rate is also used as a standard for other types of loans, such as credit cards and auto loans. The prime rate is set by each individual bank, not by the Federal Reserve. The prime rate, on the other hand, is influenced by the federal funds rate, which is set by the Federal Reserve.

The prime rate and discount rate are both key interest rates set by central banks, but they serve different purposes. The prime rate is the interest rate commercial banks charge their most creditworthy customers, such as large corporations. It influences rates on loans, credit cards, and mortgages. In contrast, the discount rate is the interest rate the Federal Reserve (or central bank) charges banks for short-term loans from its discount window. While the prime rate is market-driven and typically higher, the discount rate is set directly by the central bank to control liquidity and stabilise the economy. Changes in the discount rate can signal monetary policy shifts, whereas the prime rate adjusts based on the federal funds rate and economic conditions. Both rates impact borrowing costs but affect different sectors of the financial system.