This week’s chart features two extremely important interest rates for the U.S. economy: the 10-year Treasury rate and the fed funds rate.
The 10-year Treasury rate is a longer-term rate that the U.S. government charges on the money it borrows for ten years. By contrast, the fed funds rate is the rate banks charge each other for short-term (think overnight) loans. It’s a much shorter-term rate. It also happens to be set by the nation’s central bank, the Federal Reserve.
The chart above shows how these two rates have progressed over the year. The Fed has pushed the gold line (the fed funds rate) incrementally higher all year to combat inflation, and in general, the 10-year Treasury rate (the green line) has moved higher in response.
However, now something out of the ordinary is happening. These two rates have diverged in recent weeks. While the Fed increased the fed funds rate another 0.5 percent point to 4.5% this week, the 10-year Treasury rate has continued to trend lower. At roughly 3.5%, the longer-term Treasury rate is now a full percentage point lower than the shorter-term fed funds rate!
One way to interpret this is that the market doesn’t believe the Fed when it says it will keep rates higher for a longer period of time. Fears of a recession are looming, and bond investors are betting that the Fed will have to cut rates earlier and faster than policymakers say.
The implication for investors is that we’ll likely continue to see heightened volatility in financial markets while the market and the Fed duke it out over the future state of the economy.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.