Seems like the central banks’ soothing is working. U.S. markets were up yesterday, and international markets are up broadly today. Even the narrative has changed, with neither of the major papers dealing with the central banks or the markets on the front pages, and the only real discussion in the Wall Street Journal being “A Hawkish Signal Bernanke Didn’t Send.” Got that? Nothing to see here. Move along.

I don’t usually focus on short-term market movements, but one of the things I found interesting yesterday was that, even as rates ratcheted up through most of the day, U.S. stock markets rallied. Although one day is far too short a time to draw conclusions, at least at that scale we have demonstrated that equity markets can do well while rates increase. We also have historical evidence that this is the case, over much longer time periods.

The volatility continues, with another decline yesterday in stock markets worldwide. And yet, in the U.S. at least, after a large drop at the open, markets slowly recovered through most of the afternoon before slipping again at the close. For today, most markets are in the green, and U.S. market futures are up as I write this.

One of the risks I pointed out the other day was China. As one of the largest and fastest-growing economies in the world, China matters for a lot of reasons—mainly, at this point, because it was the only one that seemed set to power forward and take the lead in the global recovery. I’ve long had my doubts about this, but that was the general consensus.

Last week, Chinese interbank borrowing rates—the cost that banks pay to borrow money from other banks—spiked, reportedly due to a cash shortage. Chinese banks called on the People’s Bank of China to inject more cash into the system and ease the shortage.

Yesterday saw the largest one-day drop in the financial markets since last year’s election, following a significant drop the previous day. Peak to current, the S&P 500 is down more than 5 percent. What is going on here?

The easiest, and substantially correct, explanation is that markets hate uncertainty. When the Fed announced plans to taper its stimulus program, as clear as it tried to be, it forced the financial markets to recognize that one constant over the past several years—the government’s commitment to stabilize the economy—was being dialed back. Never mind that the Fed’s reason for pulling back was that the economy was improving. The fact that a change was occurring was enough to make investors reconsider—and pull back themselves.

No prizes for guessing today’s topic. The Federal Reserve’s meeting ended yesterday with the usual statement and press conference by Ben Bernanke. But, as you could see from the market reaction, what was discussed was far from the usual.

For anyone who missed it, the Fed released a statement, which Bernanke amplified in his press conference, that a pullback from the bond purchasing program is indeed in the works. He even gave a target for when the Fed plans to start pulling back: at an unemployment rate of around 7 percent. To further support this, the Fed released more cheerful economic projections that suggest the pullback would start around the end of this year or so. The financial markets promptly sold off.

I speak regularly to groups of advisors and clients, and a question that has come up several times recently is whether the housing recovery can survive rising interest rates. In other words, as rates rise, will we see average housing prices level off or even start to decline again?

Yesterday, we talked about the big picture and why the longer-term outlook for the U.S. is actually quite bright. I mentioned in passing that there are some shorter-term risks between here and there, and I wanted to spend some time today catching up on those.

The big one in the papers today is China. As you know, I’ve been very concerned about China for a long time. Most recently, I wrote about the decline in wage competitiveness and about some of the risks to the financial system, discussing in both posts the increasingly tense regional security environment in Asia.

Many of my posts over the past several weeks have focused on immediate, here-and-now issues—or, at most, ones we’ll be seeing over the next couple of months. With summer here (finally!) and sunshine cheering me up, I thought I’d take another look at the medium- to long-term future—which was good the last time I looked, about two years or so ago, and which has since gotten even better.

Two years ago, when I first gave a presentation on the longer-term outlook for the U.S., I identified several key issues: capital, raw materials/resources, manufacturing, energy, geography, markets, and labor. The U.S. was in a relatively superior position compared with its competitors in all of those areas, except for capital.

This is the last piece (for the moment) on the reemergence of price discovery in the market and what it means. We have talked about how market-based pricing of interest rates may affect the fixed income and stock markets, but what about other areas? And what about the wider effects of the retreat of central banks from economic manipulation?

Yesterday, I wrote that rising interest rates are the result of investors trying to discover what the real, market-set interest rate levels might be once the Fed starts pulling back from its stimulus program. Rate-setting by the Fed will be replaced by rates set by the market—and no one knows what they will look like.

What we do know is that rates will be higher. After all, if you remove a significant buyer from the market, demand will go down and so will prices. Lower prices for bonds will mean higher interest rates. What no one knows is exactly how much higher.