The Rate the Fed Doesn’t Set

By Mercer Hale. From MFGCalcs Magazine, Issue 1, November 2026, page 51.

A manufacturer in the Kansas City Fed’s district explained, in the bank’s August survey, why it was investing anyway: “Our growth dictated that we must invest in capital equipment. The cost of financing was painful, but we really had no choice but to absorb the higher cost of capital.”

The overnight rate had pointed the other way. From Sept. 19, 2024, to Dec. 11, 2025, the federal funds rate, what banks charge one another overnight and the rate the Federal Reserve targets, fell in six steps, and banks’ prime rate fell with each one. Anyone waiting to finance a new machine had reason to expect cheaper money.

In August the Equipment Leasing & Finance Association, the equipment lenders’ trade group, pointed to a different rate: “With the Fed’s next move now more likely to be a hike than a cut, and long-term yields showing little sign of retreating, the risks facing the industry in the second half lie in the cost of funds rather than demand.”

The Fed does not set long-term yields. One of them, the 10-year Treasury yield, what the U.S. government pays to borrow for a decade, closed at 3.70% on Sept. 18, 2024, the day before the overnight rate began to fall. The next day it rose, and it has not closed that low since.

On Sept. 15 the 10-year closed at 5%. It had risen for most of the year, while the overnight rate had taken no step in either direction. Two days later the federal funds rate rose a quarter of a percentage point, the first rise that large since July 27, 2023, and prime rose the same day to 7%.

Counting that rise, the overnight rate has come down 1.45 points since Sept. 18, 2024. The rate the Fed doesn’t set has climbed exactly as far as the one it targets has fallen.

Rates can also reach a factory through its customers. “Our fiscal 2026 proved to be more challenging than we anticipated at the outset of the year due to the headwinds impacting the RV industry. The retail market never reached the inflection point many in the industry expected, as stubborn interest rates, elevated fuel costs and ever-present inflationary pressures have strained household budgets and kept retail soft throughout the critical selling season,” Bob Martin, president and chief executive of THOR Industries, the Elkhart, Ind., RV maker, said in its September results release.

Some borrowers are not waiting. In the Beige Book the Federal Reserve published in early September, the Richmond Fed reported that business customers in its district kept borrowing, and one banker said they wanted their loans in before rates moved again.

A manufacturer asking for an equipment quote this fall does so with the 10-year higher than on any day of August, when the Kansas City Fed’s respondent called its financing painful. The 10-year’s last close in our data, on Oct. 19, was 5.15%. The last time the overnight rate moved, it went up.

Live data from this story

• Two Rates Part Ways: 10-year Treasury yield

Read it in the magazine

• MFGCalcs Magazine, Issue 1, November 2026, page 51