Which interest rate is often targeted by central banks to control economic activity?

The Federal Funds Rate is often targeted by central banks, such as the Federal Reserve in the United States, to control economic activity. This rate represents the interest banks charge each other for overnight loans to meet reserve requirements. By influencing the Federal Funds Rate, central banks can impact overall monetary policy, including influencing other interest rates, affecting consumer borrowing, spending, and investments.

When the central bank lowers the Federal Funds Rate, it encourages borrowing and investing, stimulating economic growth. Conversely, increasing the rate can help cool down an overheating economy and combat inflation. This mechanism allows central banks to steer the economy towards full employment and price stability.

It's important to note that while the Discount Rate and other rates like the Prime Rate are significant, they do not serve the same role in the monetary policy framework that the Federal Funds Rate does. The Discount Rate is the interest rate at which commercial banks borrow from the central bank, and the Prime Rate is typically set by banks based on the Federal Funds Rate but is used to price loans. However, it is the Federal Funds Rate that central banks primarily use as a tool to influence overall economic activity.