Measuring Equilibrium Real Interest Rates: What Can We Learn from Yields on Indexed Bonds?

What does the level of real interest rates tell us about where the economy, or our portfolio, is headed? The answer depends on one9s estimate of the “equilibrium” value of real interest rates, a measure that is not directly observable in the marketplace. This article provides a brief overview of some approaches to defining and measuring equilibrium real rates, and introduces a novel method based on yields on the U.S. Treasury9s inflation-indexed securities (TIIS). A simple framework for analyzing TIIS yields illustrates how to use them to gauge the stance of monetary policy and overall economic prospects.