- The term "prime rate" is generic, but usually refers to the Wall Street Journal Prime Rate, which the paper posts monthly. According to the reference website MortgageLoan.com, the prime rate is generally 3 percent higher than the federal funds rate, meaning that as that rate rises and falls, so does the prime rate.
- The federal funds rate is the rate at which banks lend to each other. The Federal Reserve moves the federal funds rate using open market operations that involve increasing and decreasing the money supply. The Federal Reserve votes periodically about whether to change the federal funds rate or keep it constant.
- Because the prime rate is often used as an index by lenders for the rates they use to lend to their borrowers, adjustments in the rate affect many parties. For example, the holder of an adjustable-rate mortgage pegged to the prime rate will pay more as the prime rate moves up and less as it moves down.
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