I assume you're talking about what is going on in America at the moment.
The Federal Reserve Bank (FRB) in the US is the equivalent of Australia's Reserve Bank (these institutions are sometimes called central banks).
The "discount rate" is the interest rate charged by the FRB on its loans to banks. Banks in the US (and Australia) can borrow from the Reserve Bank through the discount window (the Fed's lenading facility).
The Federal Fund Rate (courtest of Wikipedia):
The
federal funds rate is the
interest rate at which private
depository institutions lend balances (
federal funds) at the
Federal Reserve to other depository institutions overnight.
Here is how the system works:
- U.S. banks and thrift institutions are obligated by law to keep certain non-interest-bearing reserves with the Fed (or to keep an equal amount of vault cash, but this imposes risks and costs). The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank's demand accounts.
- Assume that a particular U.S. depository institution (Bank A) needs additional money in order to keep its reserve at the Fed at the legally required level. To this purpose, it will borrow the requisite funds from another bank (Bank B) that has a surplus in its Fed reserves. The interest rate that Bank A will pay to Bank B in return for borrowing the funds is negotiated between the two banks, and the weighted average of this rate across all banks is the effective federal funds rate.
The Federal Funds Rate is the equivalent of Australia's Official Cash Rate. The Cash Rate is what the Reserve Bank of Australia changes when they alter interest rates.
