AP MacroeconomicsMoney, Banking & Finance
Prime Rate
The prime rate is the benchmark interest rate banks charge their most creditworthy customers; it tracks the federal funds rate, usually running about 3 percentage points above it.
Banks set the prime rate themselves, but they peg it to the FOMC's federal funds target, so when the Fed moves rates the prime rate moves with them. Many consumer and small-business loans (credit cards, HELOCs, variable loans) are priced as 'prime plus a margin,' which is how Fed policy reaches everyday borrowers. The prime rate is not set by the Fed directly.
Formula / Example
Prime rate ≈ Federal funds rate + 3% (typical, not fixed)