This week, both the U.S. Federal Reserve (the central bank of the United States) and the Bank of Japan hold their policy meetings. It is the second meeting under Chairman Warsh. Many in the market expect rates to stay the same, but some think the Fed may raise them for the first time in three years. Having both decisions in one week is unusual. Because the direction of rates affects currencies and stocks, attention is high.

Behind the talk of a rate hike lies geopolitical risk over Iran. When tensions rise in the Middle East, oil prices can push up the cost of living. This raises fears that inflation (a lasting rise in prices) could speed up again. Central banks try to raise rates before prices climb too high. So the current expectation of a hike is less about a strong economy and more about preventing inflation.

Meanwhile, President Trump praised Chairman Warsh as "fantastic" while insisting that the U.S. should have the lowest interest rates in the world. He also said other Fed officials had "bad intentions." This brings up the issue of central bank independence. If markets suspect that policy moves for political reasons, long-term rates can actually rise. What long-term investors should watch is not today's rate level, but whether trust in policy holds.

The Bank of Japan is expected to keep its policy rate unchanged this week. It is still checking the effects of last month's hike. With the yen at historically weak levels, the focus is the pace of future hikes. The wider the gap between U.S. and Japanese rates, the easier it is for the yen to be sold. The yen rose a little on the 27th as oil futures fell, but the outlook for the rate gap decides its direction.

So how does this affect readers' lives and assets? If U.S. rates rise, the gap between U.S. and Japanese rates widens, and the yen tends to weaken. A weaker yen affects the prices of food and energy through import costs. The Bank of Japan's pace of hikes is directly tied to home loans and deposit rates. Rather than reacting to short-term swings in stock prices, following the structural shift in rate gaps and prices helps judgment over the long run.