Leading rates set by the Federal Reserve are major indicators that spur lending at certain interest rates. Below are three benchmark rates that impact the market.
Wall Street Journal Prime Rate
Current Prime Rate: 8.25%
This rate is the primary benchmark for consumer loan products such as credit cards and auto loans. If the prime rate were to rise, a credit card with a variable interest rate would most likely rise as well.
The rate is established by a survey of the 30 largest banks, conducted by the Wall Street Journal. When 3/4 of these banks change, the Journal will adjust the prime rate. It is the most widely quoted measure of the prime rate.
Federal Discount Rate
Current Federal Discount Rate: 5.75%
When a lending institution borrows funds directly from the Federal Reserve Bank, it does so using the Federal Discount Rate. If a bank's reserves dip below the federal requirement, it can correct the shortgage using this rate. It is considered a last resort, though, as banks typically borrow from each other.
The discount rate is used by the Fed to control the supply of funds. Inflation is more likely to occur when more money is available. The Fed can counter this by raising rates, making money more expensive and discouraging borrowing. Short-term interest rates follow this benchmark, rising or lowering depending on the action of the discount rate.
Federal Funds Rate
Current Fed Funds Rate: 5.25%
Banks are required to keep a certain level of reserves in its system at all times. To do so, banks often lend and borrow with each other. The rate they follow to do so is the Fed Funds Rate.
Very similiar to the Fed Discount Rate, it controls the available supply of money, affecting interest rates and inflation. As the Fed Funds rate goes, so does consumer rates. Of the leading rates, this is the benchmark that has the biggest impact on mortgage rates.
