E112 - How Interest Rates Actually Work: Fed Funds, Repo, and Treasury Auctions

So, uh, when I, when I searched for the top three news stories around the macroeconomic environment this year, it's, it's about the 10-year rate, it's about the forward guidance, and it's about Japan.

All three of those stories are heavily invested in interest rate narratives, right? And so, um, that, that works out perfectly because I was, uh, uh, separately, I've been thinking about doing an interest rate episode because, uh, I think it's just so important for us to become students of macroeconomics, even if it's not something that you, that comes naturally to you.

A lot of people that are, if you're watching, uh, you know, on YouTube or listening to a financial podcast, you are obviously personally interested in optimizing your own financial strategy, however that looks for you.

Uh, but you may not be as into macroeconomics as, uh, as either I am or people that, that eat and breathe this stuff.

Um, and so a- as a passionate observer of this myself, I keep seeing the same stories over and over, and I keep getting the same questions from a lot of people.

And so, um, the, the 10-year right now, story number one, uh, the 10-year treasury is the most important interest rate, I, I would argue.

I think that's pretty much the consensus view, uh, as far as things that, that matter for us as consumers, right? And so what we're gonna get to by the end of this is we're gonna try to answer the question of the cent- the, the Fed can cut rates and your mortgage doesn't go down accordingly, even though that's what you would think would happen.

And why is that? And I hope by the end of this you'll be able to answer that.

The 10-year treasury is around four point seven percent right now.

That's the highest it's been all month, and this is what's strange.

Last week, we got a weak jobs report for the month of July.

Very weak, and it got weaker.

Now, it's kind of backwards in the economic world.

Like, when you read about expectations and what's going to happen, good news for the economy can be bad news for the stock market, and vice versa.

And so when the, when the jobs report comes in weak, meaning more layoffs, more unemployment, less hiring, the market actually celebrates.

And by the market, I mean the stock market, 'cause they say, "Oh, this is an indicator that the Fed might cut rates," and that's good for stocks, right? Uh, and so you kinda have this weird, uh, th- this weird dichotomy here, where what should be good for people is bad for the market.

And in, in con- con- inversely, if they are, if, if jobs numbers come in high, big hiring, low unemployment, the market might see that as a reason that the Fed might cut rates and therefore react negatively.

Right? So, um, we get a weak job number, it could theoretically pull the rates down, the Fed comes to rescue, and everybody's good, right? That's sort of, that's sort of the counterintuitive way that the market views employment data.

So in this situation, in July, we got a very weak jobs report.

The e- economy lost jobs.

They revised the prior two months down, 'cause this is a backwards reporting metric.

It's not a great metric, but it's the, really the best we have, uh, as far as gauging e- employment, because employers report them on somewhat their own timeline.

There's the expectation of when they are supposed to report, but typically you'll get a jobs report and then T- well, a month or two later, more data comes in and it revises, right? And so that's normal.

That's about the best they can do with jobs, I, I guess.

Um, and I particularly remember in the Biden administration, there was a lot of seemingly, like, scandalous revisions where, where it's like, "Wait a second, you said this was the jobs for, for June, but then two months later, you revised it this enormous negative number," kind of thing.