Take a look at the chart showing the federal funds rate and the 10-year U.S. Treasury rate over the past 50 years. You could reasonably conclude that the two are highly correlated. And you would be right. The correlation between their monthly levels from July 1976 through July 2026 is approximately 0.92.
But that number tells a surprisingly incomplete, if not misleading, story.
Much of the correlation in the actual level of rates results from the fact that both rates reflect the same enormous, decades-long movements in U.S. interest rates. Both reached extraordinary levels around 1980 and then, notwithstanding plenty of movement up and down along the way, were part of a secular decline that lasted roughly four decades. When one rate was historically high, the other tended to be high; when one was historically low, the other tended to be low.
But what happens when we stop looking at the levels of interest rates and instead look at changes in the respective rates? That distinction matters because we routinely hear that "the Fed raised rates" or "the Fed cut rates," which is shorthand that can easily leave the impression that the Fed determines interest rates generally. It does not. The Fed directly controls an overnight policy rate — the federal funds rate, which is the rate at which banks lend reserves to each other overnight. There is no mechanical link between that rate and the yield on a 10-year Treasury. The 10-year Treasury rate is determined in a vast, decentralized market in which millions of transactions reflect investors' expectations about inflation, economic growth, fiscal policy, Treasury supply, risk, foreign demand, the term premium and, importantly, the future path of Fed policy.
If we compare a change in the federal funds rate with the change in the 10-year Treasury rate one month later — the correlation falls to approximately 0.05. Interestingly, if we reverse the sequence — compare a change in the 10-year with the change in the federal funds rate one month later, the correlation is significantly higher at approximately 0.39. This is certainly at odds with the common narrative regarding the Fed setting interest rates. But it is consistent with the fact that the bond market continuously incorporates new information and expectations, including expectations about what the Fed is likely to do. The relationship is therefore considerably more complicated than a mechanical process in which the Fed moves first and longer-term rates simply follow.
History clearly supports this more nuanced view. The 10-year can anticipate a Fed action — as it did in the spring of 2004, rising nearly 90 basis points before the Fed began tightening; barely react to one — as in December 2015, when the Fed raised rates for the first time in nearly a decade and the 10-year was essentially unchanged; amplify a move — as in early 1994, when a 25-basis-point Fed increase was accompanied by a much larger move in Treasury rates; or even move in the opposite direction — as happened recently, when the Fed cut its policy rate by 100 basis points between September and December 2024 while the 10-year Treasury yield ultimately rose substantially.
So why is there so much focus on the Fed? Part of the answer is that the Fed is highly visible. Its officials meet, vote and announce a specific interest-rate decision. The bond market has no comparable meeting, announcement or spokesperson; its judgment simply emerges continuously through market prices.
The important point is simply that "the Fed changed interest rates" describes something considerably more complicated. The Fed sets an overnight reserve rate. The market sets the 10-year Treasury rate. Both are impacted by long-term underlying economic forces but their short-term movements tell a much more nuanced and interesting story.