The federal funds rate is the interest rate it charges banks and banks charge each other. Because that is the rate that it costs the lenders,

The federal funds rate is the interest rate it charges banks and banks charge each other. Because that is the rate that it costs the lenders, when they lend money, it affects the rates they charge, for example car loans, home loans and consumer loans, including credit cards, small business loans, etc.  You will often see the “discount rate” monitored in the business news.

http://askville.amazon.com/difference-Funds-Rate-Discount/AnswerViewer.do?requestId=4528551 When money is deposited with a bank, the bank turns around and lends that money out. However, the Fed requires the bank to maintain a certain percentage of those deposits as a reserve, in case depositors want to draw money out. When a bank has excess reserves, they are known as federal funds because they are held on deposit in regional Federal Reserve banks. Sometimes a bank wants to lend out more money than it has, so it borrows it from a bank that has excess reserves. When one bank borrows money from other bank, the rate that is charged is the federal funds rate.

Sometimes, because of an unusually high demand for loans or a sudden demand for withdrawals, the amount of money the bank has as a reserve falls below the required percentage. When that happens, the bank first tries to borrow from other banks, then it tries to borrow Eurodollars, then it tries to borrow using repurchase agreements (which are loans secured by government debt obligations like T-Bills)  and finally it goes to the lender of last resort -- the fed. The rate the fed charges them is the discount rate.