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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. As such, it serves as the 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
The Wall Street Journal Prime Rate (WSJ Prime Rate) is a measure of the U.S. prime rate, defined by ''
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. As such, it serves as the 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 point
A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is one hundredth of 1 percentage point. The related term ''permyriad'' means one hundredth of 1 percent. Changes of interest rates are often stated in basis points. If ...
s (or 3 percentage points) over the federal funds rate
In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances a ...
. The Federal Open Market Committee
The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System (the Fed), is charged under United States law with overseeing the nation's open market operations (e.g., the Fed's buying and selling of United States Treas ...
(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''. 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 othervariable rate
A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument.
Floating inte ...
short term loans. It is used in the calculation of some private student loans
A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in the fact that the interest ...
. Many credit card
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the ...
s with variable interest rates have their rate specified as the prime rate (index) plus a fixed value commonly called the spread.
Wall Street Journal prime rate
The Wall Street Journal Prime Rate (WSJ Prime Rate) is a measure of the U.S. prime rate, defined by ''The Wall Street Journal
''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'' (WSJ) as "the base rate on corporate loans posted by at least 70% of the 10 largest U.S. banks". It is not the "best" rate offered by banks. It should not be confused with the discount rate set by the Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, though these two rates often move in tandem.
The print edition of the WSJ is generally the official source of the prime rate
A prime rate or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit. Some variable interest rates may be expressed as a percentage above or below prime rate.
Use in dif ...
. The Wall Street Journal prime rate is considered a trailing economic indicator. Many (if not most) lenders specify this as their source of this index and set their prime rates according to the rates published in the Wall Street Journal. Because most consumer interest rates are based upon the Wall Street Journal Prime Rate, when this rate changes, most consumers can expect to see the interest rates of credit cards, auto loans and other consumer debt change.
The prime rate does not change at regular intervals. It changes only when the nation's "largest banks" decide on the need to raise, or lower, their "base rate". The prime rate may not change for years, but it has also changed several times in a single year.
Historical data for the WSJ prime rate
References
* Various editions of the Wall Street Journal Banking in the United States Financial economics Interest rates {{Economics-stub