Q&A: What is the Prime Rate and Why Does it Matter? Scott Credit Union

That’s essentially what we saw in the last quarter of 2024 when mortgage rates shot up despite a bold half-point rate cut in September. Not only that but after two more Fed reductions, 30-year mortgage rates surged again, reaching almost 1.25 percentage points higher than they were before the Fed’s first rate cut. Scott Credit Union offers competitive rates on loans that help you save on monthly payments throughout the lifetime of your loan. Your credit score plays a vital role in the interest rate you’ll be granted for a loan. Keep your score high by using your cards sparingly and paying your credit card bills on time.

It’s not until the Fed’s June 18 meeting that the majority odds favor a quarter-point rate cut. The Fed raised interest rates to a two-decade high in 2023 to fight a period of elevated inflation, which peaked in 2022. Then, the central bank lowered interest rates as price increases eased and the nation recovered. The Federal Reserve took a wait-and-see approach to an uncertain US economy Wednesday, opting to leave interest rates unchanged at the close of its March meeting.

• Financial institutions like banks, brokerages, and insurance companies have increased cash flow since borrowers are charged more.
• This rate isn’t set on a regular schedule; instead, it fluctuates when these major banks collectively decide to raise or lower their base rates.
• However, concerns remain over global trade tensions, particularly with reciprocal tariffs set to take effect on April 2.

Any existing loan or line of credit that has a fixed interest rate is not affected by a change in the prime rate. This includes any student loans, mortgages, savings accounts, and credit cards that are issued with fixed rates rather than variable rates. “Best in this sense are the borrowers with the least risk of default,” says Jeanette Garretty, chief economist and managing director at Robertson Stephens, a wealth management firm in San Francisco. It’s usually the lowest interest rate banks will charge and is a benchmark to determine interest rates for other products, like lines of credit, credit cards and small business loans.

The latest prime rate change is in response to the Fed’s last rate cut in 2024. The prime rate is reserved for only the most qualified customers, those who pose the least amount of default risk. If the prime rate is set at 5%, a lender still may offer rates below 5% to well-qualified customers. The prime rate plus a percentage forms the base of almost all consumer and business interest rates.

Markets still see two or three cuts

Even though the Fed maintained its forecast for two cuts, economists noted that under the surface there were signs that the central bank could stay on hold for some time. That is likely to keep borrowing costs for mortgages, auto loans, and credit cards unchanged in the coming months. Powell may lay out where regulators expect the economy to go amid Trump’s escalating trade war. The Fed could make changes to its projections on inflation, the labor market and economic growth.

What Is the Impact of the Prime Rate?

Financial institutions like banks, brokerages, and insurance companies have increased cash flow since borrowers are charged more. Despite being a viable or floating interest rate, the prime rate does not regularly change. Rather, banks adjust it according to economic and business cycle manual of trade marks practice shifts. The prime rate may not change for years or may change several times within one year, especially in economically turbulent times.

Credit Unions vs. Banks: The Key Differences You Need to Know

The prime rate always adjusts based on how the Fed moves the discount rate. And you can opt for fixed-rate loans rather than variable-rate ones. But you could also opt for a home equity loan (mostly fixed-rate) rather than a HELOC (mostly variable-rate). Banks and other lenders set or nominate their own, so there are likely dozens or perhaps hundreds. Trump has signaled the economy may be in for a period of “transition” as his policies take effect, while Treasury Secretary Scott Bessent recently said the United States must “detox” from its reliance on public spending. The Federal Reserve said Wednesday it was leaving interest rates unchanged — but warned of rising uncertainty about the direction of the economy, in part because of President Donald Trump’s tariff agenda.

Related Data and Content

As you can see from the chart below, the prime rate has still not returned to the levels it was at before the Covid-19 recession, which were already elevated. In fact, since the end of the Covid-19 recession, the prime rate has steadily risen to the highest level it’s been at over the last 20 years. Retailers of both high-end and lower-cost goods have warned that consumers are turning more cautious as they expect prices to rise because of tariffs. Retail sales rose modestly last month after a sharp fall in January.

• And they tend to move ahead of Fed rate changes, based on what markets expect to happen.
• If market pricing is correct, there’s virtually no chance central bank policymakers budge from the current level of their key interest rate, targeted in a range between 4.25%-4.5%.
• The goal of the Federal Reserve is to encourage or discourage borrowing by businesses and consumers.
• To sum it up, HELOCs are essentially adjustable-rate mortgages because they’re variable based on the Fed’s monetary policy action.
• As you can see from the chart below, the prime rate has still not returned to the levels it was at before the Covid-19 recession, which were already elevated.

The prime rate is the interest rate that day trading strategies commercial banks charge creditworthy customers and is based on the Federal Reserve’s federal funds overnight rate. Note that certain lending products, like fixed rate mortgages and some student loans, are based on measures like SOFR and are less tied to the movement of the prime rate. Well, each time a lender changes its prime rate, your variable interest rates are likely to move.

These creditworthy customers are often corporate clients with the least likelihood of defaulting on their obligations and payments to the lender. Variable interest rate student loans will be affected by the Prime Rate. Variable Rate loans that were previously taken out and loans that will be currently taken will benefit from the lower Prime Interest Rate in the market today.

HSH uses the print edition of the WSJ as the What Is Bitcoin official source of the prime rate. Many (if not most) lenders specify this as their source of this index. You’ll also get the best rates by comparing offers from multiple lenders, maintaining a good credit score, and managing your debt.

Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. The prime rate may predict broader economic trends, such as higher borrowing rates and market liquidity.

The Federal Reserve raised interest rates dramatically in 2022 and 2023, then eased them in late 2024, sparking significant swings in borrowing rates on homes and cars and savings rates at banks. Throughout much of last year, Powell and the Fed were credited with steering the US economy toward a “soft landing,” cooling inflation without seeding an economic downturn. Inflation, which had peaked at an annual rate above 9%, was descending fitfully toward the Fed’s goal of 2%. If you’re currently in a fixed-rate mortgage, the Fed’s action won’t matter.