The interest rate the Federal Reserve charges banks when they borrow directly from the Federal Reserve's lending facility. The discount rate is set higher than the federal funds rate to discourage banks from borrowing this way. Banks use this borrowing option only when they cannot borrow from other banks at the lower federal funds rate.
The federal funds rate is at 5.5%, and the Federal Reserve sets the discount rate at 6.5%. A bank that needs quick cash prefers to borrow from another bank at 5.5% instead of from the Federal Reserve at 6.5%. The higher discount rate encourages banks to solve their cash needs in other ways first.
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