The U.S. Prime Rate
Careless appraisals of low quality, mortgage-backed securities by ratings agencies, combined with low interest rates and irresponsible lending created the subprime mess that is clogging up American and global financial markets. In many parts of the country, home values have been plummeting or going sideways, while the ongoing credit crunch is making it difficult for even the best credit consumers to find fair deals on loans and credit cards. Many seasoned economists are predicting a recession for 2008, which would make life even harder for a substantial percentage of middle-class Americans.
The Fed has responded to signs of economic weakness and the credit crunch by lowering interest rates. Between mid-September of 2007 and December 16, 2008, the Federal Reserve has lowered the benchmark fed funds target rate by 500 basis points (5.00 percentage points.) This has caused the U.S. Prime Rate to drop by 500 basis points as well.
The fed funds target rate is America's most important short-term interest rate, and the Prime Rate moves up and down in tandem with it. Many American consumers don't understand how the U.S. Prime Rate works, even though it's an index used for many types of consumer and business loans. Knowledge of how the Prime Rate works can help consumers make better decisions about loans, credit cards and other credit products.
NEWS: December 16, 2008 - The Fed has opted to establish a target range for the fed funds rate. American banks responded by lowering their prime lending rate by 75 basis points (0.75 percentage point.) Therefore, the U.S. Prime Rate is now 3.25%
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Copyright © 2009 Steve "AmCy" Brown, FedPrimerate.com™
How The U.S. Prime Rate Works
The U.S. Prime Interest Rate
If you are shopping for a new credit card, an education loan, a car loan, a business loan, a personal loan or a specific type of second mortgage called a home equity line of credit (HELOC) then you need to understand how the U.S. Prime Rate works.On Wall Street and throughout the worldwide banking community, the U.S. Prime Rate is understood as the interest rate at which banks lend money to their most creditworthy business customers. Most American banks, credit unions and other lending institutions use the U.S. Prime Rate as an index or base rate for numerous loan products; a margin is added to the Prime Rate depending on how risky the lending institution feels the loan is: the riskier the loan, the higher the margin. However, since the Prime Rate is an index and not a law, business owners and consumers can sometimes find loan products that have an interest rate that's below the U.S. Prime Rate, especially if the loan in question is secured.
The U.S. Prime Rate is determined by adding 300 basis points (3.00 percentage points) to the federal funds target rate (also known as the fed funds target rate.) So if the fed funds target rate is 1.00%, then the U.S. Prime rate will be 4.00%.
The federal funds target rate is America's most important short-term interest rate, and it is controlled by a group within the U.S. Federal Reserve system called the Federal Open Market Committee (FOMC). The FOMC convenes a monetary policy meeting eight times every year to decide whether to raise, lower or make no changes to the fed funds target rate. The FOMC may also hold an emergency meeting at any time, if economic conditions warrant.
If the FOMC determines that the pace of inflation within the U.S. economy is too high, then the group is more likely to raise the fed funds target rate, so as to bring inflation under control. Conversely, if the FOMC determines that numerous sectors of the U.S. economy are flagging in a significant way, or if the economy is determined to be in recession, then the group is more likely to lower the fed funds target rate, so as to spur economic growth. If the U.S. economy is growing at a moderate pace and inflation is also rising at a moderate rate, then the FOMC is more likely to make no changes to the fed funds target rate.
When it comes to borrowing money, timing is very crucial, so it's important for consumers and business owners to stay informed about what the FOMC is likely to do with the fed funds target rate at the FOMC's next monetary policy meeting. If the U.S. economy is showing clear signs of contraction, then holding off on a fixed-rate loan may be a good idea, since in such an economic environment, short-term interest rates, like the Prime Rate, may be on their way down. On the other hand, if the U.S. economy is growing at a very strong pace and the rate of inflation is relatively high, then borrowing via a fixed-rate loan sooner rather than later may be the smarter option, because in such an economic environment, short-term interest rates may be on their way up.
Copyright © 2009 Steve "AmCy" Brown, FedPrimerate.com™
Prime Rate Links
- Prime Rate History
- A comprehensive history of the U.S. Prime Rate.
- Prime Rate Flow Chart
- A flow chart that details how the U.S. Prime Rate works.
- The Current Prime Rate
- The current U.S. Prime Rate
- LIBOR
- The London Interbank Offered Rates (LIBOR).
- Interest-Only Loans
- A great article about interest-only mortgages.
- Cost of A Preowned Home
- The average and median price for a previously occupied home in the United States.
- Cost of A New Home
- The average and median price for a newly-built home in the United States.
- Prime Rate FAQ
- U.S. Prime Rate frequently asked questions (FAQ).
- Free Mortgage Calculator
- A free mortgage calculator with amortization feature.
- No Fee Balance Transfer
- 0% intro APR credit cards that don't charge a transaction fee for transferring balances.
- New Business Credit Cards
- A blog about new business credit cards in the American market.
- No Fee Balance Transfer Business Credit Cards
- Business credit cards from reputable banks that don't charge a transaction fee for transferring balances.
- Fed Funds Rate
- The Fede Funds Target Rate.
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- A comprehensive website about credit cards for small businesses.
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- Balance tranfer credit cards on Squidoo.
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- 0% Credit Cards
- The Internet's premier blog about 0% credit cards.
- Prime Rate vs. LIBOR: Which Should I Choose?
- This section of the Prime Rate website FAQ will help you choose the right index.
- Does The Prime Rate Influence The Rate I Will Get On A 30-Year Mortgage?
- If you are wondering how the U.S. Prime Rate affects the rate a consumer will get on a 30-year, fixed rate mortgage, then click this link.
- The Difference Between A Home Equity Loan and A Home Equity Line of Credit
- If you want to understand the difference between a home equity loan (HEL) and a home equity line of credit (HELOC) then check out this link.
- Chart: Prime Rate vs. Fed Funds Target Rate vs. LIBOR
- A chart of the U.S. Prime Rate vs. Fed Funds Target Rate vs. the 1-Month LIBOR rate vs. the 3-Month LIBOR rate since 2000.
- Business Credit Card
- A Squidoo.com lens about business credit cards.
- Debt Blog
- The Internet's original collaborative debt and personal finance blog.
- The Difference Between the Prime Rate and the Primary Credit Rate
- Click this link to understand the difference between the U.S. Prime Rate and the Federal Reserve's primary credit rate.
- Federal Open Market Committee (FOMC) Meeting Schedule
- Click this link for the Fed Prime Rate meeting schedule.
The Federal Open Market Committee (FOMC) meets about every 6 weeks (8 times per year), and it is at these monetary policy meetings that the Fed decides whether to raise, lower or make no change to the benchmark Fed Funds Target Rate. This is relevant to the Prime Rate because when the Fed Funds Target Rate changes, the United States Prime Rate will also change. - Definition of The U.S. Prime Rate
- A detailed explanation of what the U.S. Prime Rate actually is.
- Credit Crunch Hasn't Killed Great Credit Card Deals
- Great 0% credit cards deals are still available despite the ongoing liquidity crunch in the American banking system. Good news!
- NO BALANCE TRANSFER FEE
- Zero percent intro APR credit cards in the American market that don't charge a fee on introductory balance transfers.
- Best Business Credit Card
- Click this link to visit the best business credit cards ever webpage.
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- A Squidoo lens about student loan debt and student loan consolidation.
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- The best credit card offers, based on popularity (number of applications), application approvals, customer feedback and card terms & conditions.
- Prepaid Credit Cards
- A website about prepaid debit cards in the American market.
- LIBOR News
- News related to the London Interbank Offered Rate (LIBOR).
- Prime Rate Website SiteMap
- Use this link to navigate the Prime Rate website.
- Student Loan Debt
- The student loan debt blog.
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- Home Equity Loan
- Use this link to shop for the best deal on a home equity loan.
- Mortgage Refinance
- Probably a good idea to refinance your mortgage while rates are still seriously low.
Prime Rate Glossary
A Glossary of Terms That Are Often Used When Discussing The U.S. Prime Rate
The Fed: The United States Federal Reserve System, which acts as America's central bank.
The FOMC: Short for the Federal Open Market Committee. Made up of seven Federal Reserve Governors plus five Federal Reserve Bank presidents, the FOMC is the group within the Federal Reserve system that makes decisions on short-term interest rates, the most potent of which is the Fed Funds Target Rate (FFTR). The FOMC meets 8 times per year to set rates, and the group may also hold an emergency meeting at any time, if an intermeeting adjustment for short-term rates is expedient.
The Fed Funds Rate: The rate at which American banks borrow overnight funds from each other, via one of the 12 regional Federal Reserve banks. The Fed sets a target for the fed funds rate, and it is this target that serves as the main benchmark interest rate for the United States. The target for the fed funds rate influences other key financial market indexes, both domestic and global, like the U.S. Prime Rate and the London Interbank Offered Rates (LIBOR).
The Fed uses the FFTR to regulate the American economy, lowering it when the economy needs a boost, and raising it when the pace of inflation is too high. The FFTR was adopted as the Fed's main monetary policy tool back in 1990.
Intermeeting Rate Adjustment: This is when the Federal Open Market Committee (FOMC) convenes an unscheduled monetary policy meeting in order to make adjustments to short-term interest rates, i.e. the Fed Funds Target Rate and/or the discount rate. This type of FOMC gathering is also called an emergency meeting.
Short-Term Rates: The short-term interest rates that are controlled by the U.S. Federal Reserve, i.e. the Fed Funds Target Rate, the U.S. Prime Rate and the discount rate.
Copyright © 2009 Steve "AmCy" Brown, FedPrimerate.com™
U.S. Prime Rate News and Forecasts
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LIBOR News
The London Interbank Offered Rate (LIBOR) is a key global financial market index. This blog covers the 1-Month, 3-Month, 6-Month and 1-Year LIBOR rates associated with Eurodollars (a Eurodollar is a U.S. dollar on deposit in a non-U.S. bank.)
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spycraft
Wow... a must read for everyone... Loved the Prime Rate Glossary! ;-)
Keep up the good work!
Posted April 18, 2009
UKDomains
Thanks for the great article!
Posted April 18, 2009
cowboyrob wrote...
We learned a lot about the prime rate last year in my economic class and how it is manipulated by the Fed. The information you have here is all very precise and valuable.
Posted April 13, 2009
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Posted April 13, 2009
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Posted April 11, 2009
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Posted April 09, 2009
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We offer useful information related to personal finance. We provide content for sites like the debt help, Prime Rate, 0% credit cards and business cr...
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