About interest rates indicators
Interest rates are the price of time: what a borrower pays to use money today and what a saver earns for waiting. In the US they start with the federal funds rate, which the Federal Reserve sets to steer the economy. Short-term market rates such as the 3-month Treasury bill and the prime rate follow it closely, while longer-term yields like the 2-year, 10-year and 30-year Treasury also reflect what investors expect for inflation, growth and Fed policy years ahead. For households the rate that matters most is the 30-year mortgage rate, which follows the 10-year Treasury yield.
Comparing short and long yields gives the yield curve, one of the best-known recession signals. Splitting the 10-year yield into a real interest rate (from inflation-protected TIPS) and inflation expectations (the breakeven rate) shows whether a move in rates comes from inflation worries or from a change in the real cost of money.
Quick reading tips
- Rates usually fall quickly at the start of recessions and rise slowly during expansions.
- The 10-year yield, not the fed funds rate, is the best guide to 30-year mortgage rates.
- When the 2-year yield is above the 10-year, the curve is inverted.