Wall Street Journal Prime Rate

What it is

The Wall Street Journal (WSJ) Prime Rate is an aggregate measure of the prime lending rates reported by the largest U.S. banks. The prime rate itself is the lowest interest rate a bank charges its most creditworthy customers and often serves as the base (indexed) rate for many variable-rate loans and lines of credit.

How the WSJ rate is determined

The WSJ polls the 10 largest U.S. banks to collect each bank’s prime rate. If seven or more of those banks change their prime rate, the WSJ publishes a new aggregate prime rate. Because it reflects a broad sample of major lenders, the WSJ Prime Rate is widely used as an industry benchmark.

Relationship to the Federal Reserve

The federal funds rate (set by the Federal Reserve’s Federal Open Market Committee) is the primary driver of prime rates. Historically, the prime rate tends to be about 3 percentage points higher than the federal funds rate, so changes in Fed policy usually lead to corresponding shifts in the WSJ Prime Rate.

Historical context

Prime rates have varied substantially over time:
– Record high: about 21.50% (December 1980)
– Lower levels have been seen in periods of loose monetary policy, for example near 3.25% in times of very low short-term rates
– Prime rates rose to roughly 9.5% in the early 2000s during tighter-rate periods

Lending products that use the prime rate

Banks use their prime rate directly and as an index for many variable-rate products, including:
* Credit cards with variable APRs
* Home equity lines of credit (HELOCs)
* Adjustable-rate mortgages (ARMs) and home equity loans
* Auto loans and some personal loans

Other common indices for variable-rate products include LIBOR (historically) and U.S. Treasury yields, but the prime rate remains a common, widely recognized benchmark.

How prime-indexed variable rates work

Variable-rate loans usually have two components:
* An index (e.g., the bank’s prime rate)
* A fixed margin or spread determined by the borrower’s creditworthiness

When the index moves, the borrower’s rate changes by the same amount; the margin stays constant for the loan’s duration. Borrowers with stronger credit profiles receive smaller margins and thus lower overall rates.

Example

If a credit card’s APR is quoted as prime + 15.99%:
* With prime = 3.25%, APR = 3.25% + 15.99% = 19.24%
* If prime rises to 4.25%, APR = 4.25% + 15.99% = 20.24%

Why it matters

• The WSJ Prime Rate gives a simple, industry-wide snapshot of the base rate many banks use for lending.
• Borrowers with variable-rate debt should monitor the prime rate because movements directly affect payments and interest cost.
• Lenders set individual spreads, so identical prime-indexed products can carry different final rates depending on borrower risk.

Key takeaways

• The WSJ Prime Rate is an aggregate of the prime rates reported by the largest U.S. banks and is a commonly used benchmark.
• It is heavily influenced by the Federal Reserve’s federal funds rate and historically sits several percentage points above it.
• The prime rate is widely used as the index for variable-rate loans; changes to the prime directly affect borrowers’ interest rates.