What is the difference between the Prime Rate and Fed Funds Rate?

Question

Why is it good to know what these rates mean in terms of macro-economics?

Answer 1

Prime rate - Public Banks charge to customers (Short term to mid term rate).
Fed Funds Rate - Short term rate (1-3 nights). This is what a bank charges another bank to lend $$$.

In general, the prime rate runs approximately 300 basis points above the Federal Funds Rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements.

Answer 2

The discount rate is a rate at which the Fed may lend to a bank experiencing liquidity troubles. This is short term and the bank must provide top grade collateral. The Fed funds rate is the rate at which banks lend to each other their excess reserves on deposit at the Federal Reserve (hence the name) overnight. The prime rate (sometimes called the base rate by some banks) is a rate for short term unsecured loans to a bank's best unsecured customers.

Answer 3

Fed Funds rate is the rate where banks charge each other in short term (usually overnight) lending/borrowing.

Prime rate is a benchmark that banks often use in quoting interest rates to their customers. For example while a reputable company can borrow from the prime rate (say 10%), a less reputable one can borrow from "prime plus three fourths" , which is 10.75%. The prime rate depends on the funding cost of the banks and varies with changes in the economy.

You need to know these, because interest rates are important factors in the determination of monetary policies of a country.

Answer 4

Prime rate is a rate that large banks charge their prime corporate borrowers on short-term unsecured loans.

Fed funds rate is the rate which the Federal Reserve charges its member banks for ovrenight loans.