The discount rate and the federal funds rate are both interest rates that are set by the Federal Reserve, but they serve different purposes. The discount rate is the interest rate that the Federal Reserve charges banks to borrow money from its discount window, which is typically used when a bank is facing a short-term liquidity problem. On the other hand, the federal funds rate is the interest rate that banks charge each other for overnight loans of their reserves. This rate is used to implement the Federal Reserve's monetary policy by influencing the supply of money in the economy. Both rates are important tools for the Federal Reserve to influence economic activity, but they target different areas of the banking system.

The federal funds rate is the interest rate banks charge each other for overnight loans to meet reserve requirements set by the Federal Open Market Committee (FOMC). It directly influences short-term borrowing costs and monetary policy.

The discount rate, however, is the interest rate the Federal Reserve charges banks for emergency loans directly from the Fed’s "discount window." It’s typically higher than the federal funds rate, acting as a backup funding source.

While both rates help control the money supply, the federal funds rate is market-driven (with Fed guidance), whereas the discount rate is set solely by the Fed. Changes in the federal funds rate impact broader economic activity (e.g., loans, mortgages), while the discount rate serves as a stability tool during liquidity crises.