This paper utilizes a Markov-switching framework to model excess returns in federal funds futures contracts. This framework identifies a high-volatility state where excess returns are large, positive, and volatile and a low-volatility state where excess returns have a lower volatility and are small in absolute value. Federal funds futures rates require adjustment for excess returns only in the high-volatility state. Intermeeting rate cuts of the federal funds rate target always correspond with the high-volatility regime and can explain much of the variation in excess returns. This paper also examines previous return models and helps clarify the relationship between excess returns, business cycles, and intermeeting rate cuts. In real-time forecasting, however, the unadjusted futures rates outperform three different forecasting models. This result strengthens the case for unadjusted futures rates as a measure of monetary policy expectations.