ABSTRACT
Traditionally, economists have focused on aggregate money stock measures such as M1 and M2 as indicators of economic activity. However, the relationship between these aggregates and real gross domestic product has deteriorated. There are several reasons to consider interest rates as indicators of monetary policy and economic growth. First, the Federal Reserve has used an interest rate as one of its policy instruments. Second, macroeconomic theory suggests it is through interest rates that monetary policy actions are transmitted to the economy. Interest rate spreads may be helpful for predicting movements in output for a number of reasons. The discussion illustrates the difficulty that monetary policymakers face in the current environment. In the absence of consistently reliable indicators to gauge changes in economic conditions, it becomes necessary to monitor and interpret a wide set of potentially useful indicators with changing information content.
