The prime rate is the interest rate US banks charge their most creditworthy customers. It's not set by the Fed directly — banks set it — but it tracks the Fed funds rate almost perfectly.
For decades, the convention has been: Prime Rate = Fed Funds + 3.00 percentage points. This relationship holds within 5-10 basis points in almost every week since 1994.
Why it matters: many consumer and business loan products are indexed to the prime rate. Credit card APRs, adjustable-rate mortgages after reset, HELOCs, and small business loans are often quoted as "Prime + X%." When the Fed raises rates 25 basis points, prime rises 25 basis points within days, and so does your variable-rate debt cost.