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Who Sets Interest Rates?

Published by Aeon Flux on March 23, 2021
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If you answered, “that’s easy, the Federal Reserve,” guess again!The following statement is not true:“In the U.S., interest rates are determined by the Federal Open Market Committee (FOMC), which consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents.”Investopedia, “Understand the Role of the Fed”Investopedia is not alone in being wrong. A simple search on “who sets interest rates in the U.S.” will often yield the same, inaccurate answer, over and over, an excellent example of how search engines spread misinformation, possibly for the rest of eternity.Why are so many wrong? Why is this important?Watch a talking head business news channel in the morning, and what do you see? The interest rate of the 10-year U.S. Treasury note, constantly changing every day the markets are open.Given that the FOMC normally meets just eight times a year, how can it be that they determine interest rates that are constantly changing every trading day?Obviously, they do not, and thus the inaccuracy of Investopedia’s statement.Things get even more interesting if one considers that in the last month alone, from about Feb 19 to March 19, the 10-year Treasury note yield (another way of saying interest rate) gradually increased from about 1.3% to 1.7%. During this same period, the Federal Reserve, via the FOMC, did absolutely nothing, as the Federal Funds Target Rate has been stuck in the range 0.0% — 0.25% for over a year.How important are the interest rates of treasuries? Very, like all other interest rates, including mortgages, car loans, credit cards, business loans, etc., will be higher than the corresponding treasury debt of the same duration or term.As the interest rate of 30-year Treasury note increases, so will the interest rate of 30-year mortgage loans, possibly directly affecting you.The Primary Market for TreasuriesWhere newly created…

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