Prime Rates From 1955 to December 2022CASAPLORERTrusted & Transparent
Current Prime Rates as of December 2022
WSJ Prime Rate
Bank of America
Prime Rate Chart (1955 - 2022)
The following chart displays the Prime Interest Rate for the last 65 years up until today, giving a good idea of how the prime rate has changed in the past.
November 2, 2022 - Federal Reserve Update
The Federal Open Markets Committee (FOMC) meeting on November 2, 2022, resulted in a fourth consecutive rate hike of 75 basis points. This additional rate hike will cause prime rates to increase to 7.00% from the current prime rate of 6.25%. There has been pressure on the Fed to rapidly increase interest rates, especially as the US inflation rate remains elevated at 8.2% for September 2022. However, it's expected that the pace of future rate hikes will slow down.
Highlights from the November 2022 Federal Reserve meeting include:
- The Federal Funds Rate target range will increase by 75 basis points to 3.75% - 4.00%.
- Prime rates will, in turn, increase by 75 basis points to 7.00%, the highest level seen since 2007.
- Borrowers are being squeezed as interest rates continue to rise.
An increase in the Federal Funds Rate means an increase in prime rates. Borrowers will be affected as mortgage rates rise, with a more immediate effect on those with adjustable-rate mortgages, credit cards, and HELOCs linked to the prime rate. The U.S. housing market has been noticeably affected by this year’s aggressive pace of rate hikes.
Even as a recession looms over the horizon, markets are still predicting another rate hike of 50 to 75 basis points at the next FOMC meeting on December 14, 2022, according to the CME FedWatch Tool, This would bring prime rates to at least 7.50% in December 2022.
What is the Prime Rate?
The Prime Rate, also known as the Prime Lending Rate or Prime Interest Rate, is the interest rate commercial banks charge on financial products such as loans and mortgages for their most creditworthy customers. These creditworthy customers have the least likelihood of defaulting on their obligations and payments to the lender. In most cases, the customers with the highest credit ratings are corporate clients. The prime rate is also a reference point for different loan types. For example, a bridge loan usually has an interest rate that is 2% above the prime rate.
How is the Prime Rate determined?
Individual banks set their own prime rate. The Prime Interest Rate is different for each lender, which means that different banks can have varying Prime Rates. For example, Bank of America can set a prime rate of 3.25%, whereas Wells Fargo may have a prime rate of 3.5%. Therefore, there can be several different Prime Rates. In the US, the Wall Street Journal is the most quoted source for the Prime Rate. The Wall Street Journal surveys the 10 largest banks by assets and posts the consensus prime rate among them. The Wall Street Journal updates the Prime Rate only when 7 out of the 10 banks change their Prime Rate.
The US Federal Reserve and Prime Rate
Although the US Federal Reserve (Fed) does not set the Prime Interest Rate, it does impact it. The Prime Interest Rate is determined by the Fed Funds Rate, which is the rate US banks charge to lend to each other overnight. Banks use this Fed Funds Rate as a starting point to determine the Prime Lending Rate for their most creditworthy customers. In most cases, the prime rate is 3% or 300 bps above the Fed Funds Rate. For example, if the Fed Funds Rate = 0.5%, the US Prime Interest Rate would equal 0.5% + 3% = 3.5% on average.
Therefore, if the Fed decides to increase the Fed Funds Rate, making it more expensive for banks to lend to each other, the banks will accordingly increase the Prime Rate for their customers. Hence, even though the Fed does not officially set the Prime Rate, it does impact it through the Fed Funds Rate. The Fed meets 8 times a year to determine the appropriate Fed Funds rate.More About the US Fed Funds Rate
How is the Prime Rate calculated?
Prime Rate = Fed Funds Rate + 3% (300 bps)
What is a Basis Point or bps?
Basis Point is a unit of measurement in finance for interest rates or other rates. Basis Points are useful when values are especially small making it hard to use percentages or absolute values.
- 1 bps is equal to 1/100th of 1% or 0.0001
- 100 bps is equal to 1% or 0.01
- 300 bps is equal to 3% or 0.03
Recent Prime Rate Changes
In March 2020, due to the negative effects of the COVID-19 pandemic, the Fed initiated two emergency rate cuts to increase investments and spur the economy. These rate cuts decreased the Fed Funds rate to 0% - 0.25%, which decreased the Prime Rate to 3.25%. That’s the lowest that the Prime Rate has been since 2008! After a series of rate hikes in 2022, the Fed Funds Rate is currently in the range of 3.00% - 3.25%. With prime rates being 3% above the upper limit of the Fed Funds Rate, the Prime Rate today is 7.00%.
How are the Fed Funds Rate, Prime Rate and Interest Rate connected?
The Fed Funds Rate, the Prime Rate and the interest rate on different loans are all linked. A change in the Fed Funds rate by the Fed will result in changes in the other two rates.
The Fed determines the Fed Funds Rate. The Prime Rate is based on the Fed Funds Rate with an additional 3%. Finally, the bank determines the interest rate it charges on its loans by adding a certain Interest Rate Spread to the Prime Rate.
Wall Street Journal Prime Rate
The Wall Street Journal Prime Rate, also called the WSJ Prime Rate, used to be based on the prime rate posted by at least 23 out of the 30 largest banks in the United States. Now, the WSJ Prime Rate is based on the prime rate that is posted by at least 70% of the top 10 largest banks that the Wall Street Journal surveys.
The WSJ prime rate is widely used since it is the average of prime rates at the largest and most influential banks in the country. However, since the Wall Street prime rate is heavily influenced by the federal funds rate, the Wall Street prime rate generally moves in tandem with any rate hike or rate cut announcements by the Fed. Being the first bank to lower or increase their prime rate won’t have a significant impact, as the rest of the banks will generally follow, however aggregating it into a Wall Street prime rate makes it a more accurate reflection of Wall Street rates. While small and regional banks can always set their own prime rate, they usually use the Wall Street Journal prime rate for their own lending products.
How does Prime Rate affect you?
Prime Interest Rates affect you because they form the basis for how lenders determine interest rates for financial products such as personal loans, credit cards, and loans for small and medium sized enterprises. The Prime Rate is also used as the base or reference rate for Adjustable Rate Mortgages and other variable rate loans. If there is an increase in the Prime Interest Rate, in most cases there will be an increase in the interest rates used for other loans also.
Why do lenders charge different customers different interest rates?
The reason banks charge their most creditworthy customers a different rate as compared to others is because of default risk. Default risk is the risk taken by the banks when they lend money to customers who might not be able to pay back the loan or interest payments. Large corporations are less likely to default on their loans and hence they receive the Prime Interest Rate. Customers who are more likely to default such as individuals with a lower credit score are charged the Prime Interest Rate plus an additional margin (credit spread) because of higher risk.
What is a Credit Spread?
Credit spread is the difference between the benchmark interest rate and the interest rate charged on the loan or financial product. The benchmark interest rate can be the Fed Funds Rate, Prime Interest Rate, 5-year Treasury yield, or London Interbank Offered Rate (LIBOR). These benchmark indices act as the reference or base rate as they pose the lowest risk lenders and institutions are willing to take. Above the benchmark is the credit spread that customers are charged based on several factors such as risk tolerance of the lender, customers financials (such as credit score), the type of financial product, and a margin for profit. The credit spread is the premium lenders charge customers because they have a higher default risk or likelihood of not paying back the loan. Credit spread is measured in basis point (bps)
For example, if the benchmark rate on a loan is 5%, and the lender charges an interest rate of 8% based on your financial strength, the credit spread is 3% or 300bps (8% - 5%).
If lenders notice that their top customers (i.e. corporations) are finding it difficult to repay their debt and their credit is dropping, this can be an indicator of higher default risk. The lenders or banks will increase the credit spread they charge their customers. The higher spread will include the additional risk of lending money and will result in higher interest rates on loans.
Prime Rates Impact on Mortgages and Home Equity Lines of Credit (HELOC)
Prime Rates play a direct role in determining the interest rate you are charged on Adjustable Rate Mortgages Loans and HELOCs. ARM loans are variable rate mortgages where the interest rate charged is divided into 2 portions, the index and the margin. The index is usually the Prime Rate whereas the margin stays constant. Some government-insured mortgages, such as FHA loans and VA loans, have ARM options and allow adjustable rates. This means that FHA loan rates and VA loan rates for their ARM-option can change depending on the prime rate. Other mortgages can have adjustable rates too, such as jumbo loans and reverse mortgages. USDA loans cannot be adjustable-rate mortgages and must have a fixed rate instead. A Home Equity Line of Credit (HELOC) works in a similar way, except the margin spread is usually higher. If the Fed increases the Fed Funds Rate, the banks will likely increase their Prime Rate, which will increase the interest portion of monthly payments for ARM and HELOC loans. While the prime rate doesn’t directly affect conventional mortgages with fixed rates, rising prime rates can signify a rising interest rate environment. If you need to refinance your mortgage, higher prime rates might mean that you’ll have to refinance at a higher rate due to higher interest rates for all mortgage loan products in general.
Other countries have their own rates that affect mortgages and other financial products in their country. For example, the UK’s base rate affects mortgage interest rates, including tracker mortgages. Meanwhile, Canada’s prime rate affects Canadian mortgage rates and other loans.
Prime Rate and Credit Cards
Credit cards that have a variable interest rate use the Prime Rate as a base for the interest rate charged. Usually banks charge the Prime Rate plus a credit spread, for example if the bank determines your credit spread is 10%, and the Prime Rate today is 3.50%, the total interest charged on outstanding credit balance is 10% + 3.50% which is 13.50%.
Prime Rate and Credit Card Rates from 1995 - 2022
The above graph shows the relationship between the Prime Interest Rate and Commercial Banks Credit Card Interest Rate in the period 1995-2020. The relationship between the two interest rates shows a pattern where the credit card interest rate follows the Prime Rate. During periods of recession when Prime Rates are low, the interest rate on credit cards are also low as the base rate is low. For example, if your credit spread is 10%, if the Prime Rate is as high as 6%, the total interest rate charged is 16% (6% + 10%). In contrast, during periods of recession, if the Prime Lending Rate was 3.50%, the interest rate of your credit card may only be 13.50% (3.50% + 10%). The average credit card interest rate as of August 2021 is 14.54%, of which the Prime Rate is 3.25% and the credit spread is 11.29%.
Prime Rates and Auto Loans
Auto loans are taken for the purpose of purchasing a vehicle, similar to other short-term loans the Prime Rate impacts the interest charged on auto loans. An increase in the Prime Rate will result in higher monthly payments on the loan. As of November 2021, the average auto loan interest rate for new cars is 4.58%.
Prime Rates and Student Loans
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. Variable rate student loans have not been offered by the federal government since 2006, whereas private lenders still offer variable rate student loans. Therefore, a majority of college students on fixed rate loans cannot benefit from the low interest rates prevailing in the markets currently.
What is the prime lending rate?
Just like how the federal funds rate is the interest rate that banks lend to each other, the prime lending rate is the interest rate that the bank lends to its customers. Banks generally have the same prime lending rate at any certain point in time, which means that when you’re comparing mortgage lenders for the lowest mortgage rates, the rate that you qualify for will also depend on your credit quality and financial position.
Prime Lending Rate and Credit Spreads
|Average Interest Rate||Spread over Prime Lending Rate|
|5/1-Year Adjustable Rate Mortgage||2.47%||+2.22%|
|Auto Loans||4.60% - 5.14%||+4.35% - 4.89%|
Prime Rate History
Prime rate changes in 2022
In March 2022, the labor market was strong and employment far higher than the Federal Reserve's target. The FOMC increased its policy rate by 0.25% to a range of 0.25% - 0.50% in March 2022, and as a result, the prime rate increased to 3.5%. In May 2022, the unemployment rate stood at 3.6% and CPI inflation at 8.5%, suggesting that the U.S. Federal Reserve has delayed increasing interest rates for too long and is now behind the curve.
On May 4, 2022, a 50-bps increase in the Federal Reserve's funds rate was announced. Major banks quickly followed by increasing prime rates to 4%. Given the state of the labor market and inflation in the United States, two supersized rate hikes of 75 bps each occurred in the June 2022 and July 2022 FOMC meetings. This increased U.S. prime rates to 5.5% in July 2022.
Prime rate changes in 2021
There were no changes to the prime rate in 2021. The Federal Funds Target Rate range remained at 0% - 0.25%.
Prime rate changes in 2020
Due to the economic impacts of COVID-19, 2020 has resulted in two emergency Prime Rate cuts resulting in historical lows since 2008.
Prime rate changes in 2019
In 2019, the year started with Prime Rate at a high of 5.5% since the Housing Market Crash of 2008. However, towards the end of the year the economic expansion predicted was not occurring and the Fed slowly slashed the Fed Funds Rate. Accordingly the Prime Rate also reduced, and by years end it was down to 4.75%.
Prime rate changes in 2018
2018 saw several rate hikes through the year as the Fed reached its target inflation rate of 2% and expected steady growth in the future. Sustained economic expansion and strong labour market conditions resulted in the Prime Rate increasing to 5.35% by year's end.
Prime rate changes in 2017
In 2017, the Fed further increased the Fed Funds Rate as employment and growth in the economy was improving. This led to the increase in the Prime Rate, by years end it was 4.4%.
Prime rate changes in 2016
2016 was the first year after the Housing Market Crash that saw a rate increase to 3.5%, at years end the Prime Rate was 3.64%
Prime rate between 2008 - 2017
Following the Global Financial Crisis or Housing Market Crash of 2008, Prime Rates on average stayed consistently at 3.25%, in order to increase spending and investments to boost the economy.