The current prime rate is 8.50%, unchanged since it increased from 8.25% on July 27. The July increase was the 11th increase since the prime rate began climbing on March 17, 2022, one day after the Federal Reserve began increasing another benchmark, the federal funds rate. The prime rate plays a significant role in determining interest rates across the entire financial industry.
Since the prime rate affects corporations and individuals alike, it’s important to understand what it is and how it impacts different interest rates.
What Is the Prime Rate?
The prime rate sets the benchmark for other interest rates. While each bank sets its own prime rate, the published prime rate is the one that a majority of the top 25 U.S. commercial banks charge their most creditworthy business clients and is based on the federal funds rate. As a result, the prime rate is usually the lowest interest rate that banks will charge.
What Does This Mean for Individual Borrowers?
The prime rate directly affects other loans, including personal loans, business loans and mortgages.
A lower prime rate typically leads to more activity in the market as people take advantage of the low rates to borrow and spend money. Conversely, when the prime rate goes up, this often slows down the economy and reduces inflation.
The Prime Rate and the Economy
The prime rate is often a reflection of broader trends in the economy. During periods of high inflation, the Federal Reserve is more likely to raise the federal funds rate to control price increases, and the prime rate increases in response. During periods of lower economic growth, the federal funds rate may be lowered to encourage more market activity, driving the prime rate down as well.
For example, the federal funds rate fell to historic lows in 2020 during the initial uncertainty of the COVID-19 pandemic. As a result, the prime rate dropped to 3.25%, and mortgage rates also experienced a period of landmark lows.
What Is Today’s Prime Rate?
The current prime rate is 8.50%, and it has been in effect since July 27.
What Is the Prime Rate History?
The St. Louis Fed’s historical prime rate chart goes back to Aug. 4, 1955, when the prime rate was 3.25%. Although the rate rose and fell many times between then and its all-time high of 21.5% in December 1980, the overall trend was upward throughout that period. That trend reversed in 1981, when the rate began a gradual overall decline, falling to 3.5% in 2020.
The table below lists the prime rate changes over the past five years.
|Effective Date||Prime Rate|
|June 14, 2018||5.00%|
|Sept. 27, 2018||5.25%|
|Dec. 20, 2018||5.50%|
|Aug. 1, 2019||5.25%|
|Sept. 19, 2019||5.00%|
|Oct. 31, 2019||4.75%|
|March 4, 2020||4.25%|
|March 16, 2020||3.25%|
|March 17, 2022||3.50%|
|May 5, 2022||4.00%|
|June 16, 2022||4.75%|
|July 28, 2022||5.50%|
|Sept. 22, 2022||6.25%|
|Nov. 3, 2022||7.00%|
|Dec. 15, 2022||7.50%|
|Feb. 2, 2023||7.75%|
|March 23, 2023||8.00%|
|May 4, 2023||8.25%|
|July 27, 2023||8.50%|
How Is the Prime Rate Determined?
The prime rate is determined mainly by the federal funds rate, which the Federal Reserve controls. The federal funds rate is the standardized interest rate that banks charge each other for overnight loans.
While it is not the same as the prime rate, when the federal funds rate ticks upward, the prime rate typically follows in lockstep. For example, on March 17, 2022, the fed funds rate was in a range of 0.25% to 0.50%, while the prime rate was 3.50%. With the fed funds rate now at a range of 5.25% to 5.50%, the prime rate is 8.50%.
This system guards against bank failures. Without these loans, banks may not be able to meet the reserve requirements set by the Federal Reserve that dictate how much money banks must have on hand at the end of each business day.
The Role of Banks
Generally, banks take the federal funds rate and add roughly 3% to set the prime rate. There is no centralized authority that decides the prime rate. Instead, it’s determined by a combination of market forces and the decisions of individual banks. While banks may set their own prime rates, most banks follow the lead of the country’s largest banks.
As financial services is a competitive industry, however, it can still pay to shop around. Some banks or credit unions may offer lower rates — shrinking their profit margins along the way — in an effort to attract more customers. Others may offer rate reductions to their best customers or those with high balances.
Is the Prime Rate High Right Now?
Looking back over recent years, the prime rate is indeed quite high — the highest it has been since Feb. 1, 2001, or more than 22 years ago. But “high” is a relative term. Going back further historically, the prime rate is still quite low compared with its peak years. On Dec. 19, 1980, the prime rate reached its all-time high of an incredible 21.5%. In fact, the prime rate spent almost the entire decade of the 1980s between 10% and 20%, only falling to single digits between 1985 and 1988.
How Does the Prime Rate Affect Consumers?
The prime rate has a direct influence on the interest rates for various bank loans. In general, when prime rates increase, so do other interest rates. For example, car loans, small business loans, certain mortgages and credit card interest rates are all affected by the prime rate.
This is especially relevant for individuals who have debt with variable interest rates, as their bank can change the interest rate over time. If the prime rate goes up, the bank may decide to increase the interest rate as well. However, this is not always true across the board.
Factors Affecting Your Interest Rate
Banks don’t all increase their interest rates by the same amount. Depending on the bank’s asset portfolio and financial strategy, they may quote interest rates that are higher or lower than competitors — even if they are all working with the same prime rate.
At the same time, an individual’s credit score has a large part to play when it comes to quoted interest rates. Most banks operate within a range of interest rates depending on an applicant’s financial standing. For example, an applicant with a credit score of 720 is likely to receive a lower interest rate than someone with a credit score of 590.
When prime rates change according to the movement of the federal funds rate, consumer interest rates also change. However, it may take one or two billing cycles for any updates to take place.
Who Benefits From the Prime Rate?
There are two ways to think of beneficiaries of the prime rate. From the consumer side, those with top-tier credit benefit from the prime rate. When the rate is elevated as it is today, it may not seem like much of a benefit to have a good credit score, as you’ll still be paying 8.5%-plus for your loans. But considering that is the absolute best rate available in the marketplace today — not counting any promotional rates that lenders may be offering — it’s a true advantage. In an 8.5%-rate environment, those with low credit scores may be saddled with personal or auto loan rates in the mid-teens or even higher. Thus, on a comparative basis, top-tier borrowers are benefiting significantly from prime-rate pricing.
The other obvious beneficiaries of the prime rate are lenders. However, the relationship is a bit more complicated. Lenders don’t necessarily jump in the air and rejoice when rates reach double digits, because although it means they can charge higher rates on their loans, their cost of capital also increases. Typically, auto finance companies borrow from banks at special rates and tack on a few percentage points before lending that money out to their customers. So, while an 8.5% prime rate generates more revenue for lenders, it also likely costs them more.
How Does the Prime Rate Affect Loans?
Raising or lowering the prime rate can have different effects depending on the loan category. Generally, the prime rate has a larger impact on adjustable-rate loans and a much smaller effect on fixed-rate loans.
Adjustable-rate, or variable-rate, loans are the most affected by movements in the prime rate. Adjustable-rate loans are fixed for a period, such as the first five years of a loan. Then, their yearly interest rates move up or down according to the benchmark interest rate — usually the prime rate. Generally, loan interest rates will increase and decrease with the prime rate.
For example, suppose a customer signs up for a credit card with a 14.99% annual percentage rate. If the prime rate increases, that APR could jump to 15.50% or more. On the other hand, if the Federal Reserve lowers the federal funds rate, the prime rate may decrease and result in lower loan rates.
Many adjustable-rate loan products are advertised as “prime plus 2%” or “prime plus 9.99%” to reflect the interest methodology. This describes how the interest rate is tied directly to the prime rate. Most banks will also have a lifetime adjustment cap, which determines how much the interest rate can increase over the life of the loan.
Adjustable-rate loans are popular for two primary reasons. First, they generally offer lower upfront rates than a comparable fixed-rate loan. For example, if the current market rate for a fixed-rate loan is 10%, an adjustable-rate loan may offer an upfront rate of just 8%. After the initial fixed period lapses, the rate will then adjust to current market rates. The other advantage of an adjustable-rate loan is that if rates fall, your rate will automatically drop, without the need of going through the process of refinancing. In a falling-rate environment, this can make adjustable-rate loans a win-win, as you start out with a lower-than-market rate and it later may adjust even lower.
The prime rate has much less of an impact on fixed-rate loans because they are locked into a set interest rate that doesn’t change with the prime rate. Borrowers who take out a fixed-rate mortgage will continue paying the same rate over the lifetime of that mortgage. For that reason, in a rising-rate environment like in 2023, it can pay big dividends for borrowers to take out fixed-rate loans. This allows borrowers to lock in rates that are lower on a relative basis for the long run as rates continue to go higher. If rates fall in the future, most loans offer a provision for refinancing. Thus, locking in a fixed loan rate can be a good strategy.
What Is the Prime Rate Forecast for 2023?
No one knows for sure if the federal funds rate — and, by corollary, the prime rate — will rise, fall or stay the same for the rest of the year. Fed Chair Jerome Powell says the central bank will base decisions on data, increasing rates again if necessary but moving carefully to avoid “over-tightening,” Reuters reported. The Fed’s mandate is to keep inflation under control, and its target rate is 2%. As of October 2023, the core inflation rate was still above the Fed’s target, at 3.2%. But it has been trending downward as the Fed has continued to raise interest rates.
There are arguments both ways as to whether or not interest rates should continue increasing. Those in the so-called “hawkish” camp say that inflation still remains at an elevated level, and so the Fed should not flinch and should continue raising rates until inflation is tamed. Those in the “dovish” camp believe that interest rate increases take time to filter through the economy and that inflation will eventually fall to the 2% target. Those supporting this argument believe that further rate increases will stall the economy or even drag it down into a recession, as higher rates slow consumer spending and create increased financial burdens for households.
It’s certainly fair to say that rate increases are likely closer to the end than the beginning. But the Fed’s own projections show that the federal funds rate will likely increase to as much as 5.6% in 2023 and may remain as high as 5.1% in 2024. With the current fed funds rate at a range of 5.25% to 5.50%, that suggests that further — albeit minimal — rate increases are possible.
The prime rate is an interesting economic phenomenon. While it doesn’t directly control market interest rates, it does serve as a benchmark rate that lenders use to set the rates they charge customers for everything from personal loans to mortgages to credit cards. Though the prime rate isn’t the only factor in setting market rates — profit margins, for example, are another — it does play an essential role.
What’s important to note is that individuals can still influence the rates they receive from banks by improving their credit scores, as higher credit scores typically lead to lower interest rates and more favorable loan terms. Negotiation is another option, as competition among lenders allows for variance in the rates they choose to charge.
However, it’s also true that a good credit score or great negotiation skills will only get you so far. When interest rates rise, lenders’ costs also increase, and there’s only so much they can cut the rates they offer their best borrowers and still make a profit. At the end of the day, a rising prime rate will always translate into higher costs for consumers.
- What is the difference between the fed funds rate and the prime rate?
- Put simply, the fed funds rate is set by the Federal Reserve and is the interest rate that banks charge each other. The prime rate is set by banks and is based on the fed funds rate. The prime rate is typically about 3% higher than the fed funds rate and serves as a basis for the range of rates that banks charge their customers.
- Is the prime rate the same as an interest rate?
- The prime rate is an interest rate, but not necessarily the one you'll get on a loan. The prime rate serves as a base rate, but the rate you'll get is based on several factors alongside the prime rate, including your credit score.
- What is today's prime rate?
- Today's prime rate is 8.5%
Information is accurate as of Nov. 21, 2023.
The article above was refined via automated technology and then fine-tuned and verified for accuracy by a member of our editorial team.