The prime rate is an integral interest rate that’s published daily from the pages of the”Wall Street Journal,” an authoritative resource for financial news, stock exchange prices and financial statistics. Banks, credit-card companies and other lending institutions use the prime rate as a benchmark for the interest rates they charge clients. As a result, the prime rate is among the most important indicators of the cost of borrowed money.
The prime rate represents a survey of prices charged by lending institutions to their credit-worthy clients. The speed was initially published in 1947, as it stood at 1.75 percent. Since that time, the accumulative average prime rate has attained 9.842 percent. The maximum value was 21.5 percent, attained Dec. 19, 1980.
The”Wall Street Journal” conducts periodic polls of 30 large banks to achieve the”consensus” prime rate. In general, the prime rate changes with all the federal funds rate ascertained by encounters of the Federal Open Market Committee of the Federal Reserve Board. The fed funds rate is the rate charged by the Federal Reserve to banks for short term borrowings, and it’s corrected as the market contracts or expands.
FOMC meetings take place every six weeks. If the FOMC decides on a rate increase, the gain in the prime rate published by the”Wall Street Journal” will follow, as the prime rate normally monitors the fed funds rate at 3 percentage points over that speed. This is a guideline that has been used for some time by important U.S. banks.
In August 2010, the prime rate stood at 3.25 per cent, a relatively low amount in its history. The fee is used to determine interest charged on credit cards, for home-equity loans and lines of credit, unsecured loans, car loans and a few adjustable-rate mortgages. Lenders charge a”margin” over and over the prime rate to arrive at the prices they charge customers.
An increasing prime rate makes it more expensive to borrow money and thus more difficult to qualify for a consumer loan or credit card. It also tends to slow company for companies which need to extend credit on a regular basis to their clients. Nevertheless, the prime rate also functions as a control on the growth of consumer debt and a shield against”bubbles,” by which paying goes out of control due to easy borrowing and positive market conditions. The FOMC has an interest in keeping interest rates stable and low so as to encourage companies to invest and consumers to spend, but in addition it increases interest rates once the economy begins growing at a fast pace.