7 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 doesnt 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? Source: Prabha Natarajan and Matt Phillips, Stocks Drop; So Do Mortgage Rates, Wall Street Journal, June 25, 2010.