What is the prime rate and what makes it fluctuate?

The prime rate or prime lending rate is the short term interest rate that is determined by the Federal Reserve based on a range of economic issues. Banks or other lending institutions that provide loans use the Prime Rate as a benchmark and then add a spread to it based on the amount of risk related with the borrower. The prime rate is calculated by adding 300 basis points or 3% to the federal funds target rate. Fluctuations to the federal funds target rate are based on meetings by the Federal Open Market Committee. The Fed will meet bi-quarterly to discuss the incentives of raising or lowering interest rates. As of today June 23, 2010 the U.S. Prime Rate is 3.25 so the federal funds rate is .25.