The interest rate at which the Federal Reserve lends directly to commercial banks is called the discount rate.
The lending takes place through the Federal Reserve’s discount window, a facility that supplies short-term funds to eligible depository institutions. Banks generally borrow there when they face temporary liquidity pressure or when market funding is unusually difficult. Loans must be secured with acceptable collateral.
The term can cause confusion because the Fed operates several lending programs. Primary credit, secondary credit, and seasonal credit each have their own rate; collectively, these are discount-window rates. In everyday economic writing, however, “the discount rate” usually means the rate associated with the Fed’s direct lending facility, especially primary credit.
The discount rate is not the federal funds rate. The federal funds rate is the rate banks charge one another for overnight reserve loans, while the prime rate is a commercial-bank lending rate offered to preferred customers. Changes in the discount rate can influence borrowing incentives and signal the Fed’s stance, but it is not the main market rate targeted by the Federal Open Market Committee.