Expectations and the Treasury Bill-Federal Funds Rate Spread over Recent Monetary Policy Regimes



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    • Economist, Division of Monetary Affairs, Board of Governors of the Federal Reserve System, Washington, D.C. The author would like to thank John Duca, Steve Lumpkin, Brian Madigan, John Rea, Robert Williamson, an anonymous referee, and the editor for helpful comments, Robert Cumby and John Huizinga for making their software available to me, and Peter Nagan for survey data. The views expressed here are those of the author and do not necessarily reflect the views of the Federal Reserve Board or any other members of its staff. Any errors are my own.


This paper shows that the spread between the 3–month Treasury bill and the federal funds rate has significant predictive power for the future change in the federal funds rate during the volatile nonborrowed reserves operating regime, but it has less and no predictive power during the borrowed reserves regime and the federal funds targeting regime, respectively. These findings suggest that Treasury bill rates forecast future federal funds rates most accurately when the Federal Reserve follows a well-defined rule that does not smooth the impact of shocks on the federal funds rate.