What is the prime rate, and who borrows at that interest rate?
This is an interesting question for many borrowers. The prime rate is a “reference or base rate” that banks use to set the price or interest rate on many of their commercial loans and some of their consumer loan products. The prime rate tracks fairly closely with other short-term interest rates, such as the overnight federal funds rate; this relationship is illustrated in Chart I. As of June 2005, the bank prime rate reported on the Federal Reserve Board’s monthly H.15 Release, Selected Interest Rates, was 6.01 percent. The prime rate is a short-term interest rate The prime rate shown in Chart I is the interest rate charged by the majority of the nation’s top 25 domestic commercial banks. One interesting feature is that the prevailing prime rate typically is uniform across all banks—unlike deposit interest rates banks pay, which often vary considerably from bank to bank depending on funding needs and portfolio considerations. While individual banks may change their prime rate at any ti
