The federal discount rate is most closely linked to which interest rate?

The federal discount rate is most closely linked to the prime rate because both of these rates reflect the cost of borrowing in the economy and are influenced by the monetary policy set by the Federal Reserve. The federal discount rate is the interest rate at which commercial banks can borrow funds directly from the Federal Reserve to meet liquidity needs. This rate serves as a benchmark for other interest rates in the broader economy, particularly the prime rate, which is the rate that banks typically offer to their most creditworthy customers.

When the Federal Reserve adjusts the federal discount rate, it often causes corresponding changes in the prime rate. This connection is crucial in monetary policy, as changes to the discount rate are intended to stimulate or cool down economic activity, which in turn influences the borrowing costs reflected in the prime rate. The synchronization between these rates helps maintain the flow of credit and liquidity in the economy, making it essential for banks and borrowers alike. Understanding this relationship is vital for appraisers as it can affect property values and investment decisions.