Which interest rate reflects the direction of the Federal Reserve's monetary policy?

The discount rate is the interest rate that the Federal Reserve charges commercial banks for short-term loans. It serves as a tool for implementing monetary policy, reflecting the cost of borrowing money from the Fed. When the Federal Reserve wants to influence the economy, it may adjust the discount rate. A lower discount rate encourages banks to borrow more, increasing the money supply and stimulating economic activity, while a higher rate does the opposite by restricting borrowing and tightening the money supply.

The relationship between the discount rate and the Federal Reserve's monetary policy direction illustrates how these changes are aimed at achieving policy goals such as controlling inflation or promoting employment. Hence, the discount rate directly reflects the stance of the Federal Reserve's monetary policy.