When interest rates move, people naturally look to the Federal Reserve for an explanation. That makes sense, because the Fed plays an important role in setting short-term rates. But it does not directly control most of the interest rates consumers and investors encounter.
The Federal Reserve hasn't raised interest rates since July 2023, and the federal funds target rate has remained at 3.50% to 3.75% since the beginning of 2026.¹ Yet longer-term interest rates have been moving higher.
On September 9, the yield on the 10-year U.S. Treasury climbed to roughly 4.84%, its highest level since November 2023.²
So how can interest rates rise when the Fed hasn't raised rates?
The Federal Reserve does not set most interest rates.
The Fed directly influences a very short-term interest rate: the federal funds rate. That rate matters throughout the financial system, but it isn't the same thing as the 10-year Treasury yield, a 30-year mortgage rate or a corporate bond yield.
Longer-term rates are determined in financial markets, where investors are constantly reassessing inflation, economic growth, future Federal Reserve policy, government borrowing and the return they require to lend money for longer periods.
Short-term rates and long-term rates respond to different things
There is a big difference between lending money overnight and lending it for ten years. Over a decade, inflation can change, economic growth can accelerate or slow, Federal Reserve policy can move in either direction, government borrowing can increase and investors' appetite for bonds can shift.
Economists generally think about a longer-term Treasury yield as having two broad components: expectations for future short-term interest rates and a term premium, which is the additional compensation investors may require for holding a longer-term bond.³
When expectations about either of those components change, longer-term rates can move without the Federal Reserve changing its policy rate at all.
The shift in the Treasury yield curve over the past two years tells the story.
In September 2024, short-term Treasury yields were well above longer-term yields, creating what is known as an inverted yield curve. Today, that relationship has largely reversed. Short-term yields have declined while longer-term yields have moved considerably higher, leaving the curve much steeper.
That doesn't necessarily mean the market is simply predicting higher interest rates years from now. Longer-term Treasury yields also reflect inflation expectations, economic uncertainty, Treasury supply and the additional compensation investors may demand for committing money for a longer period.
It is also a useful reminder that there is no single "interest rate." Different parts of the yield curve respond to different forces.
Inflation is one factor investors are watching
One immediate concern is energy. Brent crude oil moved above $100 per barrel on September 9 as conflict in the Middle East intensified and concerns grew over global oil supplies.²
Energy prices affect much more than what consumers pay at the gas pump. They influence transportation, manufacturing, agriculture and many other parts of the economy.
A rise in oil prices does not automatically create sustained inflation, but it can increase inflation pressure. If investors become less confident that inflation will continue to fall, they may demand higher yields to lend money for longer periods.
The market is also reassessing what the Fed may do next
The federal funds rate hasn't changed, but expectations for its future path have.
Earlier this year, investors could reasonably imagine a future in which inflation continued falling and the Federal Reserve gradually reduced interest rates. That outcome looks less certain today.
At the Federal Reserve's July meeting, three members of the Federal Open Market Committee voted to raise the federal funds rate by a quarter percentage point rather than leave it unchanged.¹ With inflation still above the Fed's target and energy prices rising again, markets have had to reconsider how long rates may remain elevated.
A 10-year Treasury investor isn't only concerned with today's federal funds rate. What matters is the range of short-term rates that may prevail over the life of the bond. If expectations for those future rates change, Treasury yields can move before the Federal Reserve takes any action.
Government borrowing is part of the backdrop
The U.S. Treasury expects to borrow approximately $739 billion in privately held net marketable debt during the July-through-September quarter, followed by another $628 billion during the final three months of 2026.⁴
Treasury securities are considered among the safest financial assets in the world, but they still need buyers. As the supply of Treasury securities grows, the yield investors require to absorb that debt can become more important.
Government borrowing is better understood as part of the longer-term backdrop than as an explanation for any single day's movement in Treasury yields. Bond markets respond to many factors at the same time.
Over time, however, the balance between Treasury supply and investor demand can influence the term premium investors require to hold longer-term government debt. The Federal Reserve has also discussed how changes in Treasury ownership may affect that premium.⁵
Why does the 10-year Treasury matter?
Treasury yields sit near the foundation of the financial system, and the 10-year Treasury is particularly important because many other longer-term borrowing rates are influenced by it.
Mortgage rates, corporate borrowing costs and other longer-term loans generally reflect some combination of Treasury yields and additional compensation for credit risk and other factors.
That is why someone waiting for the Federal Reserve to "cut mortgage rates" may be watching the wrong number. The Fed could lower its overnight policy rate while longer-term rates remain elevated. The opposite can happen as well: long-term rates can decline before the Fed changes policy if investors begin expecting weaker growth or lower inflation.
Higher rates aren't entirely bad news for investors
For borrowers, higher long-term rates aren't particularly welcome. For investors, especially retirees, the picture is more complicated.
Higher market yields generally mean investors purchasing bonds today can access more income than they could when yields were lower. The tradeoff is that rising yields generally push the market value of existing bonds lower, particularly bonds with longer maturities.
Higher Treasury yields can also affect stock valuations. When relatively safe government bonds offer investors more competitive returns, stocks have to compete harder for investment dollars.
None of this means investors should suddenly abandon stocks for bonds or try to predict the Federal Reserve's next move. It simply means the investment environment has changed.
What Does This Mean for Investors?
When someone says "interest rates are going up," a useful first question is:
| “Which interest rate?”
The federal funds rate is one interest rate. The 10-year Treasury yield is another. Your mortgage rate is another. They are related, but they are not interchangeable.
Interest rates may continue higher. Inflation could cool and pull yields back down. Economic conditions could change, and today's expectations could look very different several months from now.
Trying to predict every move in interest rates is rarely a useful foundation for a financial plan. A better approach is to build a plan that can function across several different interest-rate environments.
For retirees, that may mean reviewing bond duration, income needs, cash reserves and the amount of interest-rate risk within a portfolio. For borrowers, it may mean recognizing that waiting for the Fed to lower rates does not necessarily guarantee that mortgage rates or other long-term borrowing costs will follow.
Understanding which rate is moving, and why, can be more useful than simply asking what the Federal Reserve will do next.
| Better financial decisions start with understanding.
Bryan Yach, CFP®
Owner & Wealth Advisor, Yach Advisors
Related Article:The Federal Reserve Might Have to Start Hiking Rates Soon
Yach Advisors provides this material for educational and informational purposes only. It should not be considered individualized investment, tax or legal advice.
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Sources & References
1. Board of Governors of the Federal Reserve System. Federal Reserve Issues FOMC Statement. July 29, 2026.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20260729a.htm
2. Reuters. Oil, Treasury Yields Turn Higher as Stocks Falter. September 9, 2026.
3. Board of Governors of the Federal Reserve System. Ben S. Bernanke, Long-Term Interest Rates. March 1, 2013. Discussion of expected future short-term rates and the term premium as components of longer-term interest rates.
https://www.federalreserve.gov/newsevents/speech/bernanke20130301a.htm
4. U.S. Department of the Treasury. Treasury Announces Marketable Borrowing Estimates. August 3, 2026.
5. Board of Governors of the Federal Reserve System. Minutes of the Federal Open Market Committee, June 16–17, 2026.