What Is the Wall Street Prime Rate?
Most personal loans and lines of credit given by banks are determined by the prime interest rate at the time. This interest rate is the bench mark by which all other loans move up and down.
What Is the Prime Interest Rate?
The prime interest rate is set by the United States Federal Reserve board, which meets quarterly to discuss whether the rate needs to move up, down or stay the same. The board makes this decision largely based on how the economy is doing at the time and uses the rate to mitigate the effects of inflation. As a general trend, the better the economy is doing, the higher the prime rate will climb. This makes money more expensive to borrow.
Banks and the Prime Interest Rate
The prime rate is the lowest interest rate available to non-banks to borrow money. This is also called the prime lending rate, and preferred customers of the bank can obtain loans for a car or home at or around the prime lending rate depending on their credit score. This prime lending rate is set by the bank, but usually moves in conjunction with any changes in the prime rate set by the Federal Reserve.
Wall Street Prime Rate
Although the majority of banks have a prime interest rate very similar to that of the Federal Reserve, banks have the ability to set their own prime lending rate. This produces some slight fluctuation in prime interest between all the large banks in the United States. Due to this slight discrepancy, the Wall Street Journal began surveying the 30 largest banks regarding their current prime lending rate. When three-quarters of the banks change their rate, the Wall Street Journal rate changes accordingly. This rate sometimes is a more accurate reflection of the interest rate that a consumer can expect to pay for a loan.
Changes Over Time
The prime interest rate is usually changing, moving up and down over time depending on the state of the economy at the time. For example in 2018 the prime rate was around 4.5 percent but has steadily climbed, resulting in a rate of 5.5 percent in 2019.
The Economy’s Relation to Prime Interest Rates
The United States economy is one of the largest in the world and because of this the state of the economy has the ability to make an impact on a global scale. The prime interest rate set by the Federal Reserve is one of the many methods used by the government to make sure the economy is functioning properly. When the economy is doing very well, the prime interest rate will continue to increase until economic growth slows. Increasing the interest rate makes sure that banks and businesses do not become over-leveraged, meaning they take on too much debt in relation to how much cash they actually have.