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.

— Guest post from Peter Essele, senior investment research analyst

After the strong sell-off recently in the closed-end market, I figured it’s a good time to revisit an ongoing theme we’ve covered.

There have been two big stories in the markets recently: rising interest rates and stock market volatility. I think these two themes are actually connected by a deeper factor—the reemergence of price discovery in the financial markets—and it is that we should be focusing on, as the underlying story will drive future developments.

Price discovery is the prime function of markets. The idea is that, in a free market with willing buyers and sellers, the price that emerges will reflect the actual, most economically efficient allocation of resources. When markets are not free, the price that emerges won’t necessarily result in economic efficiency.

One of the sectors that investors are looking at closely now is financial services. The idea is that, as the economy recovers, banks and other such companies will be well positioned to profit. In fact, the argument goes, they will be well positioned to return to the profit levels of the mid-2000s.

It was a year ago that we launched this blog, and I thought it would be interesting to consider how the world has changed since then. Day to day, changes may be small, but, over a year or more, they can add up to something much bigger. (I’m going to try something different with this post and say it mostly with charts. Let me know what you think in the poll at the end of the post.)

Employment and wages