The federal funds rate is the interest rate banks charge each other for overnight loans, and it is steered by the Federal Reserve. The prime rate is the rate banks charge their most creditworthy customers, and it is set by each bank, almost always at 3 percentage points above the top of the Fed's target range. The two are different rates with different jobs, but because of that fixed 3-point link, the prime rate moves whenever the Fed moves. On October 20, 2026 the effective federal funds rate was 3.88% and the prime rate was 7.00%.

Two different rates, one connection

The federal funds rate is a wholesale rate. Banks hold reserves, and at the end of each day some have a little extra while others are short. They lend to each other overnight to settle up, and the rate on those loans is the federal funds rate. The Fed does not dictate it directly; it sets a target range and uses its tools to keep the actual, or effective, rate inside that range.

The prime rate is a retail benchmark. It is the rate a bank advertises for its best business and personal customers, and it serves as the base for a wide range of consumer lending. The Fed does not set the prime rate, and in theory each bank could choose its own. In practice they all move together, because they all key off the same federal funds rate.

The 3-point rule

By long-standing convention, the prime rate equals the top of the Fed's federal funds target range plus 3 percentage points. When the Fed's upper bound is 4.00%, the prime rate is 7.00%. This spread has held steady since the mid-1990s, so in practice the prime rate is a mirror of Fed policy, shifted up by three points. The Wall Street Journal publishes the most widely used prime rate, based on a survey of large banks, and it changes within a day of an FOMC decision. For how the central bank sets the policy rate in the first place, see how the Federal Reserve works.

The 3-point gap is a convention, not a law of nature. Before 1994 the spread moved around more, and banks adjusted prime less predictably. Since then, large banks have changed prime in step with the Fed and kept it exactly three points above the target's upper bound, which is why a single prime rate now applies across almost the entire industry. That consistency helps borrowers: a Fed decision translates into a known change in prime, and from there into a known change in any prime-linked rate, without guesswork.

Where both rates stand now

The Federal Open Market Committee raised its target range by a quarter point on September 16, 2026, to 3.75% to 4.00%, in a 12 to 0 vote. Its statement said the committee "decided to raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent." The prime rate followed to 7.00%, effective the next day. On October 20, 2026 the Federal Reserve's H.15 release showed the effective federal funds rate at 3.88%, inside the target range, and the bank prime loan rate at 7.00%. The committee's next decision is due October 28, 2026.

How a Fed move reaches your wallet

A change in the federal funds rate does not touch your accounts directly, but it travels quickly. The moment the Fed changes its range, banks reset the prime rate, usually within a day. Anything priced off prime then adjusts: most credit cards are quoted as prime plus a margin, so the rate on a carried balance changes with it. Home equity lines of credit, many personal and small-business loans, and some private student loans are also prime-linked and reset the same way. Savings rates can move too, though banks tend to pass increases to depositors more slowly than they pass them to borrowers.

Not everything follows prime. A 30-year fixed mortgage tracks long-term Treasury yields, not the prime rate, which is why mortgage rates can move in a different direction from Fed policy. Auto loans sit somewhere in between. Knowing which of your rates are prime-linked tells you which ones change the day the Fed acts.

What the prime rate touches

The clearest example is a credit card. A card quoted at prime plus 13 points carries a rate of 20% when prime is 7%. If the Fed raises its range by a quarter point, prime goes to 7.25%, and that card's rate becomes 20.25%, flowing through to the interest on any balance carried from month to month. The same mechanism works in reverse when the Fed lowers rates. Because the margin is fixed in the card agreement, the only moving part is prime, and prime only moves when the Fed does. For how banks earn the spread between what they pay and what they charge, see how banks make money.

What to watch

The single number to follow is the top of the Fed's target range, because the prime rate is always three points above it and most variable consumer rates key off prime. When the Fed changes its range, expect prime-linked credit cards and lines of credit to change within a day; a fixed-rate loan already in place does not move. Reporting the mechanism is the point here, not predicting the Fed's next step, which the committee explains at each meeting.