Just as Tim Macarak was publishing his take on the most recent Fed meeting, and Dane was writing his post about the cost of being wrong, a reporter noticed a note written on the yellow pad of Treasury Secretary Scott Bessent: "To Do: Buy Japanese Yen (JPY) $5-10 bil."
Two days after the Fed's July meeting, the U.S. and Japan conducted a rare, coordinated intervention to prop up the yen, which had fallen to near 40-year lows against the dollar.
So why would the U.S. do this?
Besides helping out an ally, Japan is the biggest foreign holder of U.S. debt. In other words, Japan owns a large amount of U.S. Treasury bonds, so this is also a story about the bond market. Tim wrote that the Fed did not raise rates at its July meeting, and then Dane noted that despite the Fed holding steady, "longer-term interest rates moved higher, with the yield on the 30-year Treasury reaching levels last seen before the 2008 financial crisis. The bond market seemed to be saying that, with economic growth holding up and inflation still elevated, maintaining the same short-term rate may not be enough." He added, "Policymakers may set short-term interest rates, but they do not entirely control the cost of a 10-, 20- or 30-year loan."
The yield on the 10-year Treasury bond is the benchmark for things like mortgages and car loans, so if you're thinking about the timing of buying a house, it's more what bond traders decide than what the Federal Reserve decides that will drive the interest rate you pay.
Countries like Japan buy U.S. bonds because of their stability, but if they need the money to support their own economy, they may sell some of their U.S. bond holdings. That would push down the price of those bonds, and the yield would move higher, pushing up interest rates on mortgages, car loans, and other loans like corporate debt. So companies whose stocks investors own would have to pay more to borrow money.
The reasons for the U.S. to help prop up the yen, both official and surmised, are complex. We're allies, helping our economy, there are geopolitics involved, it could be an investment opportunity for the U.S., and there's whatever else goes on behind the curtain that we don't know. But it also highlights the complexity of risk we take on as investors. It's rarely something we see coming, and it's rarely just one thing. It's a mosaic of risks that work together and can rear its ugly head when least expected, which is why it's so hard to time markets.
That's why when we help clients build their plan, we lead with risk, in a framework we call Wealth Done R.I.T.E. (Risk, Investment, Tax, Estate).
Japan's economy may stabilize, and they may continue to be large holders of U.S. debt. Or it may not, and they might start to sell, which would affect our economy and could knock down other dominoes. That's the whole point of leading with risk. You're not trying to guess the next headline, you're making sure the next headline can't knock you off plan.
If you're wondering about the risk in your financial plan, schedule a call today.
Tim Thomas is the co-founder of Members’ Wealth and serves as the firm’s Chief Operating Officer. Prior to this position, he worked in a variety of roles including consultant to the Bank of New York’s investment platforms, branch manager and Director of Service and Operations at Lockwood Financial, and as a specialist clerk on the New York Stock Exchange. In recent years, Tim started and operated an RIA, consulted other RIAs, and worked as a financial coach and consultant on financial strategy for small companies and nonprofits.
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