Discount Rate
The Federal Reserve loans "overnight" money to banks and banks are charged a fee, call the Discount Rate. It is the interest rate charged by the Fed and the rate is controlled by the Fed. The Fed generally only loans money to very large banks, who in turn provide "overnight" funds to other banks. The Discount Rate is the base interest rate for all money loaned to consumers and business. The higher the Discount Rate, the higher the final interest rate charged by Banks and vice versa.

Federal Funds Rate
Another key term involving interest rates. The Federal Funds Rate is the interest rate charged by banks when banks borrow "overnight" from each other. The Funds Rate is always higher than the Discount Rate. It fluctuates according to supply and demand. It is not controlled directly by the Fed, but is strongly influenced by their action. The Fed adjusts the Funds Rate by Open Market Operations. The target Funds Rate is usually about 1% above the Discount Rate.

Open Market Operations
This is the process used by the Fed to indirectly control the Federal Funds Rate. This is what happens. The Fed sells US Treasury Securities to banks. As a result, the bank reserves at the Fed drop. Banks are mandated to maintain a certain reserve level, based on their demand deposits (checking accounts). So they must borrow "overnight" funds from other banks to cover their short position with the Fed. This added demand for available funds drives the Funds Rate up. The Fed continues to sell US Treasury Securities to banks until they reach their Federal Funds Rate target level. The target Funds Rate is usually about 1% above the Discount Rate. The larger the spread between the Discount Rate and Funds Rate, the fatter the profits for the big banks which routinely borrow from the Fed at the Discount Rate.