The Fed can raise or lower the discount rate to influence the federal funds effective rate rate. For example, if the economy needs to be stimulated, it may lower the discount rate. If banks can borrow money from the Fed at a lower rate, this encourages them to lower the rates offered to their customers.
FOMC sets a target federal funds rate eight times a year, based on prevailing economic conditions. The federal funds rate can influence short-term rates on consumer loans and credit cards as well as impact the stock market.
