The discount rate is the interest rate on loans that the federal reserve makes to banks. banks occasionally borrow from the federal reserve when they find themselves short on reserves. a lower discount rate banks' incentives to borrow reserves from the federal reserve, thereby the quantity of reserves in the banking system and causing the money supply to . the federal funds rate is the interest rate that banks charge one another for short-term (typically overnight) loans. when the federal reserve uses open-market operations to sell government bonds, the quantity of reserves in the banking system , banks' need to borrow from each other , and the federal funds rate .