Policy Transmission

Policy transmission means the process through which central bank policy affects the real economy and financial markets. In simple terms, it shows how a rate decision turns into changes in borrowing, spending, investment, inflation, and jobs. Policy transmission is important because central banks rely on it to influence the economy. Interest rates affect banks, loans, asset prices, exchange rates, and confidence, which then affect businesses and households. For example, when the Fed raises rates, mortgages and business loans may become more expensive, which can slow spending and investment. Policy transmission is not instant. It can take months or even longer for policy changes to fully affect the economy.