The U.S. Prime Rate is a commonly used, short-term interest rate
in the banking system of the United States. All types of American
lending institutions (traditional banks, credit unions, thrifts,
etc.) use the U.S. Prime Rate as an index or foundation rate for
pricing various short- and medium-term loan products. The Prime
Rate is consistent because banks want to offer businesses and consumers
loan products that are both profitable and competitive. A consistent
U.S. Prime Rate also makes it easier and more efficient for individuals
and businesses to compare similar loan products offered by competing
When newspapers, academics, investors and economists refer to the
National, Fed, U.S. or WSJ Prime Rate, it is widely accepted that
they are in fact referring to The United States Prime Lending Rate
as listed in the Eastern print edition of the Wall Street Journal®
(WSJ). Furthermore, each U.S. state does not have its own individual
Prime Rate, so the "New York Prime Rate" or the "California
Prime Rate" are in fact the same as the United States Prime
Prior to mid-December 2008, the WSJ Prime Rate was determined by
polling thirty (30) of America's largest banks. When twenty-three
(23) of those 30 banks had changed their prime lending rate, The
WSJ would respond by updating its published Prime Rate. Effective
December 16, 2008, however, the WSJ now determines the Prime Rate
by polling the 10 largest banks in the United States. When at least
7 out of the top 10 banks have changed their Prime, the WSJ will
update its published Prime Rate.
Providers of consumer and commercial loan products often use the
U.S. Prime Interest Rate as their base lending rate, then add a
margin (profit) based primarily on the amount of risk associated
with a loan. Moreover, some financial institutions use Prime as
an index for pricing certain time-deposit products like variable-rate
Certificates of Deposit.
It's important to note that the Prime Rate is an index, not a
law. Consumers and business owners can sometimes find a loan or
credit card with an interest rate that is below the current Prime
Lending Rate. Lenders will sometimes offer below-Prime-Rate loans
to highly qualified customers as a way of generating business. Furthermore,
below-Prime-Rate loans are relatively common when the loan product
in question is secured, as is the case with home equity loans, home
equity lines of credit and car loans.
Every U.S. bank sets its own Prime Rate. However, the Prime Rate
is invariably tied to America's cardinal, benchmark interest rate:
the Federal Funds Target Rate (also known as The Fed Funds Target
Rate.) The Fed Funds Target Rate is set by a committee within the
Federal Reserve system called The Federal Open Market Committee
The FOMC usually meets every six weeks, and it is at these meetings
that the FOMC votes on whether or not to make changes to the Federal
Funds Target Rate. When the Fed Funds Target Rate changes, it is
almost a certainty that the Wall Street Journal Prime Rate will
also change. If the FOMC votes to make no changes to The Fed Funds
Target Rate, then it is almost a certainty that the WSJ Prime Rate
will also remain unchanged. Since the second quarter of 1994, a
rule of thumb for the U.S. Prime Rate has been:
U.S. Prime Rate = (The Fed
Funds Target Rate + 3)
The FOMC's primary objectives are to keep inflation under control
and maintain steady economic growth with maximum sustainable employment
within the United States.
The U.S. Prime Interest Rate is used by many banks to set rates
on many consumer loan products, such as student loans, home equity
lines of credit, car loans and credit cards. If you read or hear
about a change to the U.S. Prime Rate, then any loan product that
is tied to the Prime Rate will also change, like variable-rate credit
cards or certain adjustable-rate mortgages.
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The Current Wall Street Journal Prime Rate is:
(the last rate change -- a decrease of 75 basis
[0.75 percentage point] -- occurred on December 16, 2008)