Budgeting Your Project

Factors Affecting the Prime Rate

The prime rate is among the most important amounts for the U.S. economy. Lenders rely upon it to ascertain what interest rates they’ll charge on mortgage loans, home equity lines of credit and credit cards. This rate, which relies on the federal funding rates set by banks, fluctuates very little over time. There are some factors, however, that may make it fall or rise.

Federal Funds Rate

The biggest factor influencing the United States’ prime rate is the federal funds rate. Here is the rate that banks charge each other for the overnight loans that they create as a way to fulfill federally set funding requirements. Generally, the prime rate will endure about 3 percentage points above the federal funds rate. The U.S. prime rate really changes very little.

The Wall Street Journal

The financial newspaper The Wall Street Journal is actually the market of, and really sets, the prime rate. Before the end of 2008, The Wall Street Journal mechanically changed the prime rate whenever 23 from 30 of the nation’s largest banks changed their federal funding rates. Today, however, the Wall Street Journal bases its prime rate on the base rates charged by the nation’s top 10 banks. When seven of those 10 have changed their base prices, the paper changes its prime rate so. This has caused a stable rate: The Wall Street Journal has retained its prime rate at 3.25 percent since December of 2008.

Open Market Committee

According to the Fed (U.S.) Prime Rate Website, the prime rate is most likely to change after a meeting of the Federal Reserve Board’s Open Market Committee. This body retains its meetings eight times annually, though it may hold emergency meetings at any moment.

See related