Why would the interest rate on a two year treasury note

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Reference no: EM131305359

The Federal Reserve sets a target for the federal funds rate, which is the interest rate banks charge each other on overnight loans. Although the Fed doesn't actually set the federal funds rate, it is sometimes referred to as the "Federal Reserve interest rate," as in this excerpt from a story from the Wall Street Journal:

The yield on the two-year [Treasury] note- seen as a proxy for expectations on the direction of Federal Reserve interest rates- dropped to 0.63% early on Thursday, near a record low. . . .

a. What does a "proxy for expectations on the direction" of an interest rate mean?

b. Why would the interest rate on a two-year Treasury note provide information on what investors are expecting future values of the federal funds rate to be?

Reference no: EM131305359

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