An important way monetary policy affects the economy is through household spending. When the Federal Reserve increases or lowers interest rates, the effects do not end with just the businesses most exposed to the resulting changes in household spending.

Term premium, a central concept in analysis of interest rates and monetary policy, is generally viewed largely as compensation for bearing interest-rate risk. However, Treasury asset swap spreads strongly indicate the existence of a distinct premium—a term funding premium—associated with merely providing term financing. This funding premium shows promise as a real-time indicator of Treasury market stress.