What sets each rate
The Federal Reserve does not set a single interest rate. The FOMC announces a target range for the federal funds rate and holds the market inside it with two administered rates: the interest it pays banks on reserve balances (IORB) and the rate on its overnight reverse repo facility. The effective fed funds rate (EFFR) is where overnight unsecured loans between banks actually trade, so it is the policy rate as the market prints it.
Treasury yields are set in the market, not by the Fed. The 2-year yield is roughly the average policy rate investors expect over the next two years; the 10-year adds a decade of expected rates plus a term premium, the extra return for holding a long bond instead of rolling short ones. The term-premium row is a model estimate (Kim-Wright, Federal Reserve Board), not a traded price.
The average interest rate on Treasury debt moves slowly by construction. It is the blended coupon on everything the government has outstanding, so it changes only as old debt matures and is refinanced at current yields.
How markets price Fed rate hikes and cuts
Expectations for the Fed show up first in short-dated yields. If investors expect hikes, the 2-year yield rises above the effective fed funds rate; if they expect cuts, it falls below. Treasury bills work the same way over shorter horizons: a 3-month or 1-year bill yield sits close to the policy rate expected over the bill’s life.
The gap between the 2-year yield and the EFFR is therefore a rough read of the expected path, not a forecast, and it carries a small term premium of its own. Fed funds futures and overnight index swaps price the path meeting by meeting; this page does not track them.
Real yields and breakeven inflation
A 10-year Treasury Inflation-Protected Security (TIPS) pays a real yield on top of realized CPI inflation. The nominal 10-year yield minus the TIPS real yield is the breakeven inflation rate: the average inflation at which the two bonds would return the same. It is read as the market’s inflation expectation, though it also carries an inflation risk premium and the effect of the TIPS market’s lower liquidity.
Real yields matter for asset prices because they are the return on a risk-free asset after inflation. When the real yield rises, so does the hurdle every other asset has to clear.
What the curve shape means
The 2s10s spread, the 10-year yield minus the 2-year, is the most quoted measure of the curve’s slope. Positive means longer debt yields more, the usual state. Negative means the curve is inverted: markets expect short rates to be lower in the future than they are today.
The curve tends to flatten or invert while the Fed is raising rates and the 2-year climbs faster than the 10-year, and to steepen when cuts are expected. The 2022 hikes inverted it for about two years. This page describes the shape; it does not treat an inversion as a timing signal for the economy or markets.