This paper introduces a model-based measure of the equilibrium federal
funds rate and examines the indicator properties of the spread betwee
n observed and equilibrium rates. The results are compared to those of
existing studies, which implicitly use long-term interest rates to pr
oxy the equilibrium funds rate. Granger-causality tests suggest that d
ifferent measures of the term-structure spread are dominated by the fu
nds-rate spread as a forecaster of a wide range of macroeconomic varia
bles. These results are supported by variance-decomposition analysis.
The paper also estimates simple VARs to discuss how the policy stance
responds to macroeconomic shocks.