U.S. prime rate

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Historical U.S. prime rates

The U.S. prime rate is in principle the interest rate at which a supermajority (3/4ths) of large banks loan money to their most creditworthy corporate clients.^[1] As such, it serves as the de facto floor for private-sector lending, and is the baseline from which common "consumer" interest rates are set (e.g. credit card rates). Traditionally, the rate is set to approximately 300 basis points (or 3 percentage points) over the federal funds rate. The Federal Open Market Committee (FOMC) meets eight times per year wherein they set a target for the federal funds rate.

In the United States, the prime rate is traditionally established by the Wall Street Journal.^[2] Every major bank sets its own prime rate. When 23 out of the 30 largest US banks change their prime rate, the Journal publishes a new prime rate.

Uses[]

The prime rate is used often as an index in calculating rate changes to adjustable rate mortgages (ARM) and other variable rate short term loans. It is used in the calculation of some private student loans. Many credit cards with variable interest rates have their rate specified as the prime rate (index) plus a fixed value commonly called the spread.

See also[]

• Wall Street Journal prime rate

References[]

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