Question

Why would low policy rates suggest low long-term interest rates? A simple answer- less than a paragraph

Answer 1

The setting of interest rates is a component of monetary policy. Low policy rates will mean that there is an expansionery monetary policy and there is an attempt to stimulate the economy. Low policy rates will mean that the trend of monetary policy is decided for the future in terms of discount rates that have been set today. Thus low monetary policy rates essentially means the discount rate is set at a low rate. This will mean that borrowing rates will also be lower in the future and hence long term interest rates will be lower as that follows the benchmark set by the discount rate.