Prime Rate vs. Fixed Rates

How is the prime rate and fixed rate determined?

1 Answer

Good question. The prime rate is the rate banks charge each other for overnight loans. The rate tied to the fed funds rate. The federal reserve board sets the fed funds rate at their regular meetings while decideing fiscal policy. The prime rate is always 3 points higher than the fed funds rate. At the time of this article the fed funds is at 4.25 plus 3 equals Prime rate of 7.25%.

Fixed rates are not directly impacted by moves in the fed funds rate. They are indirectly affected by how the fed views inflation. Fixed rates are determined by the mortgage backed securities. If the fed believes that inlation is a high risk, then people will withdraw their funds from MBS's and interest rates will rise.