How do banks set interest rates?

Banks set interest rates based on a variety of factors, including the federal funds rate, the prime rate, and market conditions. The federal funds rate is the interest rate at which banks lend funds to each other overnight. The prime rate is the rate that banks charge their most creditworthy customers. Banks also consider market conditions, such as supply and demand for loans, the strength of the economy, and inflation. Additionally, banks may take into account a borrower’s creditworthiness and the type of loan being offered. By considering these factors, banks can determine an appropriate interest rate that balances risk and profitability.