On Tuesday the U.S. released its Consumer Price Index — the gauge that measures how fast prices are rising in the stores — and it came in better than feared: annual inflation, meaning the rise in prices over the past 12 months, cooled from 4.2% to 3.5%. And yet, the market still bets that the U.S. central bank's next move will actually be to raise rates further, perhaps as soon as September. That very same week, the Bank of Israel did the exact opposite, cutting its rate to the lowest level since 2022.
How can the same tool — the interest rate — be pushed in opposite directions in two economies, in the very same week? To answer, let's stop for a moment on what an interest rate actually does.
A central bank essentially has one main lever. When the economy runs too hot and prices climb fast, it raises the rate: loans get more expensive, people and companies borrow and spend less, and the pressure on prices cools. When the economy loses speed and weakens, it does the reverse — cutting the rate so money is cheap, to encourage people to buy and companies to invest. In that sense, an interest rate is like medical treatment: the exact same medicine cabinet, but what you prescribe depends entirely on the diagnosis. A patient with a high fever needs something to cool them down; a healthy, calm patient can actually go out and exercise. Our two countries are those two patients.
The U.S. is the patient whose fever won't quite break. True, June was a cooler month, mostly because energy prices tumbled, but inflation there has run above the 2%-a-year target for five straight years now. Part of the current rise comes from tariffs — taxes the U.S. placed on imported goods, which ultimately make them more expensive for the consumer — and part comes from service prices that, once they went up, are in no hurry to come back down, and keep creeping quietly higher. Above all sits a clear stance: the new Fed chair, Kevin Warsh, said plainly that his priority is bringing inflation down to target, even at the cost of a weakening job market. We talked about that in the previous letter. So the American finger stays close to the "raise" button.
Israel is the other patient, the one who feels fine. Inflation here stands at just 1.6% over the past 12 months, the lowest in five years, sitting comfortably inside the target of one to three percent a year. Prices of fresh fruit and vegetables fell, so did clothing, and even transportation. With prices this calm, the Bank of Israel can afford to cut rates to support growth, instead of fighting a rise in prices it doesn't have. There's another quiet reason we've met before: the strong shekel itself helps. A strong shekel makes everything Israel imports cheaper, which pushes inflation down, and that is exactly what gives the Bank of Israel the room to cut.
So this week we got two friendly economies, the same year, opposite prescriptions — simply because they are sick with opposite illnesses. That gap touches directly on the thing many of us watch: the dollar-shekel rate. When dollars pay more interest than shekels, the world's big money prefers to sit in dollars, and that supports the dollar against the shekel, at least in the short term. Indeed, the shekel, after touching a 33-year high against the dollar, has already weakened against it by about 3%.
What does it mean for your pocket?
For anyone in Israel holding a mortgage tied to the rate, the Bank of Israel's cut is real, tangible good news. The monthly payment gets a little lighter, and that's real money staying in the account at the end of the month. For anyone keeping their money in a shekel deposit, the trend runs the other way: the relatively generous interest you got on that deposit last year is shrinking, and this environment gently pushes some of that money to look for other places to go.
And here comes the eternal question, the one we get asked every time the rate moves: so maybe now, when the gap leans toward the dollar, is finally the time to buy dollars? We wrote a whole letter about this once, and the answer today hasn't changed. The long-term forces that strengthen the shekel — demographics, gas, and high-tech — didn't budge this week, not even a little. A rate gap is a temporary crosswind, not a change in the story. The right question to ask is always the same one: did the story change, or did only the number move? And this point touches even those who have never bought a single American stock, because most Israelis hold a sizable slice of the U.S. market through their pension fund, their study fund, or a fund that tracks the 500 largest U.S. companies. A U.S. central bank leaning to raise rates is a headwind for American stocks, so the decision made in Washington quietly moves Israeli savings too.
Before we part, we can't ignore one event from this week, simply because it is too big. Shares of IBM, one of the oldest technology companies in the world, dropped 25% in a single day. It was the worst day in the stock's history — worse even than the famous crash of 1987 — and in one day about $67 billion was wiped off it. What happened there? The company pre-announced a weak quarter, explaining that its customers had shifted their budgets: instead of buying software and services, they rushed to buy hardware, servers and memory, to build AI data centers. A few large deals simply slipped. And here hides the $67 billion question: is this a temporary shift of budget that will find its way back, or a real crack at the heart of the company's story? IBM's full report comes out on the 22nd, and next week we'll sit down and take it apart, slowly and calmly: an opportunity, or a chance to run. We've got something to come back for.
We shall see.
See you in next week's letter — or sometime during the week, if I can't hold myself back until then...