Changes in the fed funds rate cause a lock-step change in the prime rate, with the spread between the prime rate and fed funds rate locked in at approximately 3%. Similar to the pattern of changes in the prime rate mirroring changes in the fed funds rate, changes in the commercial bank rate on credit card plans also mirror changes in the fed funds rate. The trends between the three rates are closely related, reflecting that the prime rate serves as a base rate for the interest rate on credit card debt. The commercial bank interest rate on credit card plans is greater than the prime rate, which is greater than the federal funds rate. Changes in the fed funds rate also cause a lock- step change in the 3-Month Treasury Bill Yield. The spread between the two rates has hovered around zero over the past ten years. Changes to the fed funds rate will generally cause a lock-step change to the prime rate, the commercial bank interest rate on credit cards, and Treasury Bill yields. Effective Federal Funds Rate, Bank Prime Loan Rate, Commercial Bank Interest Rate on Credit Card Plans, and 3-Month Treasury Bill Yield October 2016 – October 2025 (Sources: Board of Governors of the Federal Reserve System (US); Federal Reserve Bank of New York via Federal Reserve Economic Database)
The graph below shows the relationship between the effective federal funds rate (blue line) and two long-term interest rates: the 30-year fixed rate mortgage average in the United States (green line) and the 10-year Treasury Bond Yield (orange line). Although changes in the fed funds rate generally ripple through to changes in long-term interest rates in some degree, there is generally not a lock-step relationship between changes in the fed funds rate and long-term interest rates. Specific factors in addition to the fed funds rate affect long-term interest rates in financial markets. Other factors that affect mortgage rates include the demand for loans by home buyers, home prices, inflationary expectations, and available funds by financial institutions. As a result, the magnitude of change in the federal funds rate is typically different from the magnitude of change in mortgage rates. Although changes to the fed funds rate have generally moved mortgage rates in the same direction, exceptions have occurred due to other factors influencing mortgage rates. Treasury bonds are long-term financial securities that are also used to help the federal government fund budget deficits. Contrary to the relatively constant spread between the federal funds rate and 3-Month Treasury Bill Yield, the spread between the federal funds rate and 10-Year Bond Yield varies. Different factors affect the rates, particularly the impact of inflation and the specific demand and supply of the bonds.
Central Wisconsin Report - Fall 2025
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