Two Hands, Two Different Signals
What happened in the money world this week, explained
Quick vocab first
The U.S. government has two big money departments. The
Treasury handles borrowing and spending money.
The Federal Reserve (people just call it
"the Fed") controls interest rates, which is basically the "price"
of borrowing money. They're supposed to work as a team, but this
week they sent completely opposite messages on the same day.
Move 1: Treasury
The Treasury announced it would double a program where it buys back
its own long term debt (called bonds) between September and early
November. Buying back debt pushes borrowing costs down, kind of
like a store buying back its own coupons so it doesn't have to pay
out as much later. It worked almost instantly: interest rates on
30 year loans dropped noticeably that same day.
Move 2: The Fed
Then, on the very same day, notes from the Fed's last meeting came
out, and they said the opposite: officials think they might still
need to raise interest rates if inflation (prices going up
too fast) doesn't slow down soon. Higher rates make borrowing more
expensive, the reverse of what Treasury was just doing.
Why it's confusing
Imagine your school announced shorter homework this week, and on
the same day your teacher announced a pop quiz because grades
have been slipping. Both are real, but they point in opposite
directions, and nobody knows which one matters more right now.
That's basically what happened with interest rates.
What investors did
Gold jumped 3.6%, its highest price since early June. When people
aren't sure what's going to happen with money, they often buy
gold because it tends to hold its value no matter what. Tension
with Iran over economic issues added to the nervousness too.
Stocks got split
The stock market had been falling for three days, then bounced
back, but not evenly. "Safe" stocks like healthcare companies did
well. Riskier, high growth stocks like computer chip makers fell
more than 6%, since those companies get hurt most if borrowing
stays expensive. Even Home Depot, which had good sales numbers,
still dropped because investors were more focused on the bigger
confusion than on one store's good quarter.
The bigger number
All of this is happening right as the national debt (the total
amount the U.S. government owes) passed $40 trillion for
the first time ever. That's a 40 followed by 12 zeros, more money
than anyone could spend in a thousand lifetimes.
What happens next
On Friday, the head of the Federal Reserve gives a big speech at
an annual meeting in Jackson Hole, Wyoming. Everyone in the
financial world will be listening closely, because that speech is
expected to finally clear up the confusion: are rates more likely
to go up, or down, from here?
Two hands, one government, opposite signals.
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