Dear Reader,
Three central banks met inside seventy-two hours last week.
The American press covered one of them.
I understand why. Our Federal Reserve raised interest rates on Wednesday for the first time in three years, and it did it unanimously — twelve votes to nothing, after three members had dissented at the previous meeting. That's a story.
But the more consequential decision of the week, I'd argue, was made in Tokyo on Friday morning while most of America was asleep.
What Japan Did
The Bank of Japan raised its policy rate to 1.25%. Seven votes to two.
That is Japan's second increase in three months, from a central bank that spent most of the last three decades refusing to move at all. And it stated plainly that it intends to “continue to raise the policy interest rate.”
Now here's the strange part.
The yen weakened anyway. It traded past 157 to the dollar on the news.
Traders positioned for something bigger.
Two board members dissented, both appointed by the current Prime Minister. So the market read an actual rate hike as evidence that Japan isn't in a hurry.
Why A Quarter Point In Tokyo Matters More Than One Here
Let me explain the plumbing, because almost nobody does.
For roughly thirty years, Japan was where the world got cheap money.
If you could borrow in yen at close to zero percent, you could take that money anywhere on earth and buy something that yielded more. Brazilian bonds. American technology stocks. Australian property. Anything.
You weren't really investing. You were arbitraging the gap between Japan's interest rate and everybody else's.
That trade is one of the quiet foundations under a great many asset prices you own.
And it only works while Japanese rates stay near zero.
They are no longer near zero. And the central bank just told you it intends to keep going.
Let me be honest about what I don't know. Nobody can tell you the true size of that trade, or the pace at which it unwinds. Anyone handing you a precise number is guessing.
But the direction isn't a guess. Thirty years of the world's cheapest money is being withdrawn, a quarter point at a time, on Friday mornings in a market Americans don't watch.
And England Did Nothing, Loudly
The Bank of England held its rate at 3.75% on Thursday.
But three of its nine members voted to raise. And the committee said upside risks to inflation have increased since July.
Hold the whole week in your hand for a second.
America hiked. Japan hiked. England came two votes short of hiking.
The last time every major central bank was pulling in the same direction at the same time, it was 2022. It did not leave asset prices where it found them.
What I'm Watching This Week
Monday is quiet. No economic data at all.
Tuesday brings the weekly ADP employment read, and a speech from Richmond Fed President Tom Barkin.
Wednesday is the one that matters: flash manufacturing and services PMI. It's a survey, so it's opinion rather than fact — but it's the first real look at how American businesses felt after Wednesday's hike.
Thursday brings Costco earnings, which I pay closer attention to than most government releases. Costco's members are the American middle class, and Costco tells you what they are actually putting in the cart.
Friday brings durable goods orders.
Pro tip: the live argument is no longer whether the Fed hikes again. It's October or December. And the October meeting sits days before the midterm elections — exactly the sort of calendar problem that makes December the cleaner move for a central bank that would rather not become a campaign issue. Watch the December odds, not the October ones.
What Nobody Is Watching At All
Here's what actually struck me this week.
Every central bank on earth spent seventy-two hours arguing about the price of money.
Not one person asked what the money itself is made of.
Your dollars — the digits in your bank account — are protected by encryption. A wall of secret code. That is the whole thing. There is no vault.
And in June, two executive orders were signed that almost nobody read, setting hard deadlines in writing for the day that old code has to be gone.
Not because of crypto. Not because of a central bank digital currency. This has nothing to do with either, and I'd ask you to set both aside.
Because of physics. The lock is breakable, Washington knows roughly when, and it has quietly begun rebuilding the dollar on a foundation that isn't built on code at all.
I've spent eight months on this — including a closed-door briefing, and conversations with the vice chairman of the House Financial Services Committee.
By my measure it is the biggest change to American money in more than fifty years. The last time the foundation under the dollar was rebuilt, it made a small number of people who understood it extraordinarily wealthy, and it left millions of careful savers on the wrong side of it.
I've written the entire story down, including the one American company Washington just moved to take an ownership stake in.
The Bottom Line
The price of money went up nearly everywhere in the world last week.
That deserves your attention, and it's what everyone will be talking about tomorrow morning.
But the price of money changes every few weeks.
What money is made of has changed exactly once in the last fifty years — and it is being changed again right now, on a deadline Washington has already put in writing.
If you read one thing this weekend, read the full story of the Quantum Dollar.
Markets open tomorrow morning.
I'll see you then.
Enjoy the rest of your weekend.
"The Buck Stops Here,"
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Written by Dylan Jovine