Long Term Perspective
In the 1980s, the spread between the federal funds rate and the bank's prime rate was 174 basis points, less than the 302 basis point spread averaged in the 1990s. While it does appear that banks got greedy in the 1990s, the reality is that the "bank prime rate" has a different meaning today. In the 1980s, the prime rate was considered the lowest rate reserved for banks' best customers. In the mid to late 1980s, the best customers were getting charged lower rates than the prime rate. Banks changed the name of the prime rate to "corporate base rate." These days, many consumer and small business loans are tied to this rate. As a result, the spread remains high at 300 basis points.

Short Term Perspective
The bank prime rate is an administered rate, not a market rate, and is tied directly to the federal funds rate. Whenever the Federal Reserve Board announces a change in the fed funds rate target, banks will alter their prime rate within 24 hours by an equal amount. If the prime rate were tied to market rates, it would fluctuate as often as yields on Treasury securities.

Interest rates on equity loans and credit card debt are typically tied to the prime rate. The low level of the prime rate these days are allowing consumers to benefit from low rates on loan types that generally offer higher rates. Even though consumer spending isn't necessarily booming these days, low rates on credit cards and equity loans are helping consumers to hold down debt burdens.