Prime Rate Should Hold Steady For A While

The Federal Reserve indicated yesterday that it will hold the Fed Funds Rate at its current target of zero to 1/4 percent long after the unemployment rate comes down. This signals that the low Fed Funds Rate will be one of the last easing levers the Fed will maintain. Because of this, and the fact that banks price the Prime Rate on the Fed Funds Rate, the Prime Rate will likely stay low for the foreseeable future.

The big caveat to the Fed’s intention is inflation. If inflation takes hold and is unable to be contained, the Fed Funds Rate may become the primary lever to fight inflation. In that case, all bets are off and they may be forced to raise rates.

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