The Federal Funds Interest Rate Meets the Prime Rates

This paper explores the impacts of the Federal Funds Rate (FFR), a significant money market indicator, on the prime lending rates offered by commercial banks. Prior to 1994, the FFR had lagged effects on prime rates, but since the second quarter of 1994, the Federal Reserve Bank has implemented monetary policy which explicitly and publicly target the FFR. Commercial banks have since relied on the FFR to promptly modify the prime rate in response to changing policies. The results of the study signify that transparency in monetary policy targeting can facilitate desired effects, thereby increasing efficiency