The Federal Reserve or simply “the Fed,” is the central bank of the United States. It was created by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Two of the Fed’s primary responsibilities are to maintain prices and maximize employment. One action they can take is adjusting interest rates in order to address inflation and market conditions. These interest rate adjustments by the Fed tend to flow through the economy in ways that may impact borrowers and savers.

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The prime rate is an interest rate determined by individual banks. It is often used as a reference rate (also called the base rate) for many types of loans, including loans to small businesses and credit card loans. Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate, which is established by a committee of the Federal Reserve. The Fed makes adjustments to the federal funds rate in order to try to stabilize the market.