How does the Federal Reserve affect interest rates that are charged by banks for loans?
When the 'fed' raises interest rates, the banks who borrow from the fed, must pay a higher rate of interest for their loans. They in turn figure out how much the prime rate needs to go up in order for their banks to maintain the profit spread.
The prime rate is the rate at which banks lend to their very best customers, and these are commercial loans, not mortgage-backed loans. After ...
The solution explains how the FOMC influences interest rates at all public financing institutions in the US. The 280 word explanation provides a decent summary for the process in which interest rates are changed.