Interest Rate Policy and Yields

One thing that is clear is that the interest rates determine very much the shape of the yield curve, they are very important to it.

Long yields are sensitive to the movements too.

What is interesting with interest rates is that they tend to lag behind what the actual economy is doing, because they are made on what has happened and what is the state of play now, rather than really being made in anticipation of what might happen in the future.

For instance in general if the economy starts to heat up, interest rates will go up to stop inflation, which will slow down the economy as a result.

The problem is the balance that interest rates could stay too high for too long and that can lead to a recession as they are always playing catch up due to the lag.

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