Federal Prime Interest Rate
The Federal prime interest rate is used by major banks for their creditworthy customers on various types of loans. The prime rate is based upon the federal funds rate set by a committee that meets several times a year. The Federal Reserve prime rate stays the same unless the majority of the largest banks change their rates or the Fed Reserve board (Fed) changes it when economic conditions warrant a change. This standard is used to calculate percentages on credit cards, home equity lines of credit, auto loans, and other types of loans. The Federal Reserve board has the job of trying to maintain a stable economy and keep the financial system strong to try and avoid inflation. The secret toward success with anything includes acknowledging the Lord in everything. "And all these blessings shall come on thee, and overtake thee, if thou shalt hearken unto the voice of the LORD thy God" (Deuteronomy 28:2).
The prime rate affects short-term loans such as credit cards or home equity lines of credit. Banks that issue credit cards to consumers try to protect their own interest by not offering accounts with lower interest than the Federal prime interest rate. A credit cardholder can find out if the percentage on his or her account will be affected when the standard set through the Federal Reserve Board changes by looking at the cardholder agreement. Most banks or financial institutions add a certain percentage to the standard rate set by the Fed to come up with the percentage of interest set on the cardholder's account.
The standard percentage set by the Fed can have an affect on investments. This can largely be seen in investments with certificates of deposit and with bank savings accounts. A lower standard percentage issued by the Fed usually means that a certificate of deposit will not be worth as much and it can also mean that percentages on a savings account will go down. Many of the banks and financial institutions that offer consumers a way to save will change their interest based upon fluctuations in the Federal prime interest rate. The fluctuations are not normally a large amount and can be in the consumer's favor if the standard percentage goes up as interest earned. When the changes in the percentage increase then investments can increase as well.
When the standard percentage set by the Fed increases then consumer spending will go down. Businesses are less likely to grow due to fewer sales from consumer spending. Increases in the standard percentage can even lead to unemployment and slow economic growth. Some of the considerations or economic indicators of upcoming increases in the standard percentage are housing, employment levels, and growth in the money supply. When the economy is suffering and consumers are not spending this may prompt a lower Federal Reserve prime rate.
A lower standard percentage encourages consumers to spend more. Lower percentages on mortgage loans, car loans, and even credit cards will help to speed up consumer spending and help the economy to grow. A lower standard percentage encourages people to buy a home or refinance the one they have. When there is a large amount financed then even the smallest changes on the interest can make a significant difference. This difference for a homeowner would also mean paying off the mortgage much sooner. New mortgages mean more money for banks and causes growth because it increases building. An increase in building means more jobs and more consumers to put money back into the economy.
Small business loans and consumer loans are often priced according to the Federal prime interest rate. Customers with very high credit scores are good candidates to receive the lowest interest on loans. The standard percentage set by the major banks and the Reserve serves as a starting point for short term loans such as credit cards and auto loans. For customers who are considered a risk, banks and other loan institutions may start with the standard percentage but then add on a substantial amount of interest to more than cover losses. The finance charges associated with credit cards can vary depending upon the payment history of the customer. If a customer is late in making a payment a bank may be able to raise their finance charges considerably.
When the economy seems to be growing too fast the Fed will raise the Federal Reserve prime rate to avoid inflation. Inflation causes the prices of goods and services to increase. When this happens the value of the dollar goes down. Eventually inflation can cause an economy to stall. The value of the dollar can affect foreign investments and the sell of products to other countries. The Fed tries to maintain a balance in the economy where there is slow growth by controlling the standard percentage rate that can be charged on loans.
Inflation is measured by the Gross Domestic Product and the Consumer Pricing Index. The Gross Domestic Product measures goods and services within a year's time. This does not take into consideration financial transactions or used products that are sold. The Consumer Pricing Index is used to try and guess the measure of inflation and is used in figuring product increases from one year to the next. When the Fed meets to consider the Federal Reserve prime rate they use the numbers from the Gross National Product as one way to measure the economic outlook.
Federal Reserve Prime RateThe federal reserve prime rate can have a far-reaching effect on economic issues and the household budgets of many consumers. Even so, many people find it difficult to understand the up and down movements of interest rates. They sometimes aren't sure exactly why economists, legislators, and news commentators anxiously await the announcement of what fraction of a percentage point the Federal Reserve has raised or lowered its rate. But these movements and percentage point fractions are catalysts for both institutional and international borrowing and lending, then filter down to influence interest rates on consumer borrowing and even investment returns. This is why it's so important to have at least a basic understanding of economic and financial issues. When consumers make financial decisions for their families, it's helpful to understand how those decisions can be influenced by governmental economic factors such as the federal reserve prime rate.
The United States Federal Reserve Board is an independent government agency that was created by legislation that President Woodrow Wilson signed into law in December 1913. This entity is made up of seven members, known as the Board of Governors, who are appointed by the President and confirmed by the Senate. The members serve single fourteen-year terms that are staggered to ensure some continuity on the Board, which is commonly referred to as the Fed. Many people believe that the federal reserve prime rate is decided by the Fed, but this isn't accurate. The Fed controls two other important rates, the federal funds and discount rates. Banks are required by law to have a certain monetary amount in reserves. If a particular bank goes below that amount, then money is borrowed from other banks to reach that required level. The interest that banks pay to each other for the money they borrow is called the federal funds or overnight rate. When the banks borrow from the Fed instead of other banks, they pay what is called the discount rate. Because the Fed prefers the banks to borrow from each other instead of borrowing from the Fed, the discount interest is usually higher than the federal funds interest. A federal reserve prime rate isn't actually controlled by the Fed.
Prime rate actually refers to the interest that banks charge their very best and most reliable customers. This interest percentage may vary from one lending institution to another though probably not by much. It can also fluctuate depending on various factors. Naturally, if a company can borrow money at the lowest possible interest, then the savings in debt repayments can be passed along to customers or add to its profitability which can be passed along in the form of dividends to stockholders. Businesses are very interested in knowing what interest percentage banks are charging the best customers so that they can borrow money as close to that same percentage as possible. Because the prime rates for banks are very close to each other, a single percentage is commonly referred to as the federal reserve prime rate. This percentage is important to the economists, legislators, the business community, and consumers because so many loans and investments are affected.
In recent years, many potential homeowners applied for and were approved for adjustable rate mortgages (ARMs). Though the initial monthly payments were affordable for these homeowners, the upward adjustments in the interest rates created problems with the household budgets. The rates increased because they were tied to what people commonly refer to as the federal reserve prime rate. When it increased, so did the interest on the mortgage. Even a one percent increase could mean a mortgage payment that is now hundreds of dollars more than the initial payment. For many families, this has been a crushing financial burden which has underscored an important truth: "The rich ruleth over the poor, and the borrower is servant to the lender" (Proverbs 22:7). As people began losing their homes, both the federal government and mortgage holders are looking for solutions to resolve this national calamity. Additionally, many home equity lines of credit (HELOC) are also tied to the prime rate so that even consumers with more traditional fixed-rate mortgages find the minimum payments on HELOC debt rising and falling depending on federal economic factors.
To add to the household financial burden, many consumer credit cards are tied to this same federal reserve prime rate. As the percentage point creeps up, even if only by a fraction of a percent, the interest rates on these credit cards also rise. Minimum monthly credit card payments increase and that can place an additional burden on an already stressed household budget. With more money going to increased mortgage/HELOC and credit card payments, less money is available for other consumer spending. A downward spiral begins where retailers are receiving less revenue which may result in job layoffs. Consumers can protect themselves, though perhaps not totally, from the effects of the ups and downs of the federal reserve prime rate by becoming economically literate and making wise financial decisions. Money experts can provide consumers with important information on the benefits of fixed-rate mortgages, the best use of a home equity line of credit, and the folly of carrying balances on credit cards. Those who find themselves in a financial mess should seek wise counsel on getting out of debt and investing in an emergency fund so that better financial decisions can be made in the future. Though perhaps no one can be totally immune to the shifting lending rates, a household with a fixed mortgage payment, little consumer debt, and invested savings will make it through tough economic times.