The prime rate piggybacks off the federal funds rate, which is one of the Federal Reserve's primary tools for nudging the economy. Banks typically take the federal funds rate and add three percentage points to get their prime rate. The central bank doesn't exactly set the federal funds rate; it's ultimately decided by market supply-and-demand forces. But the Fed's policymaking panel — called the Federal Open Market Committee, or FOMC — establishes a target for the federal funds rate.