A gift to you from the Federal Reserve system...

We all talk about the Fed and lowering interest rates, but I realized I wasn't exactly sure how the prime rate mechanism worked.

What it means: The initials stand for the Wall Street Journal, which surveys large banks and publishes the consensus prime rate. The Journal surveys the 30 largest banks, and when three-quarters of them (23) change, the Journal changes its rate, effective on the day the Journal publishes the new rate. It's the most widely quoted measure of the prime rate, which is the rate at which banks will lend money to their most-favored customers. The prime rate will move up or down in lock step with changes by the Federal Reserve Board.

How it's used: The prime rate is an important index used by banks to set rates on many consumer loan products, such as credit cards or auto loans. If you see that the prime rate has gone up, your variable credit card rate will soon follow. [More]

I think the message today is clear: for Pete's sake, make sure all your short (operating) and intermediate (machinery) loans are variable rate.