In recent discussions, a Vice President from the research division of the Federal Reserve Bank of St. Louis addressed criticisms aimed at the central bank, particularly from a notable congressional figure: Ron Paul’s Money Illusion
● Proponents of Quantitative Easing II (QE2) argue its success: Quantitative Easing and America’s Economic Rebound
● Another voice supporting the effectiveness of QE2 is Scott Sumner: Feldstein–>Glasner–>Feldstein
● Conversely, Mark Thoma believes it’s premature to make definitive claims: Long and Variable Lags in Monetary Policy
● Additionally, central bankers have shown some willingness to learn from historical events: A Historical Perspective on the Great Recession
The recent update on jobless claims suggests a potential turning point. The latest report on weekly unemployment benefit filings indicates a decline to a seasonally adjusted 368,000 for the week ending February 26, marking the lowest level of initial claims since May 2008. This statistic also signifies a milestone, as it represents the first instance of consecutive weekly readings below 400,000 since the recession’s end.
When it comes to asset allocation, the notion that “more is better” often holds true in theory. However, the question arises: how much diversification is excessive? Intuition suggests there is a threshold beyond which diversification yields diminishing returns. Identifying this point can be challenging, particularly since diverse portfolio strategies can quickly overwhelm analysis, complicating the quest for straightforward insights. Therefore, exploring an infinite array of options isn’t always helpful in offering universally applicable guidance.
My latest feature for Financial Advisor has just been published, focusing on the evolving landscape of factor indexing. This approach is becoming increasingly user-friendly. However, the real question remains: does increased ease equate to improved risk-adjusted returns, particularly within a multi-asset class context? Readers can find the digital version of the article here.
The latest ADP Employment Report for February shows enough positive momentum to foster optimism about the recovery of the labor market. Yet, the figures still fail to alleviate concerns regarding the likelihood of sustained job growth, which is expected to remain modest for the foreseeable future.
Felix Salmon, a blogger for Reuters, expresses his frustrations with the market, suggesting that we should ignore it for the sake of our sanity. He observes, “The one thing I’ve learned over the past three years is that the market just isn’t a sensible or rational place,” as he writes.
The manufacturing sector shows strong momentum. The latest update from the ISM Manufacturing Report for February indicates that “economic activity in the manufacturing sector expanded in February for the 19th consecutive month.” This uptick has brought the index back to its highest level since 2004. The pressing question remains: will this resurgence in manufacturing lead to job growth?
Prospects for the Economy and Monetary Policy
William Dudley, President and CEO, NY Fed | Feb 28
…we need to closely monitor how households and businesses respond to fluctuations in commodity prices. The central concern is whether rising commodity prices will lead to heightened inflation expectations. While previous commodity price cycles have varied, they have not consistently risen in relation to other prices. Over the long term, substantial spikes in commodity prices in one year typically stabilize or decline within a year or two. This tendency has historically suggested that metrics of current core inflation are generally more reliable than those of current headline inflation in predicting future inflation rates.
In contrast, the past decade has seen a notable uptrend in commodity prices…
However, it is important to note that the Federal Reserve should exercise caution regarding recent commodity price pressures. Firstly, the recent rise in food prices is largely attributed to diminished production due to adverse weather, rather than a surge in demand. Improved weather conditions should facilitate increased production, which, in turn, is expected to lower prices. This anticipation aligns with market expectations. Secondly, even if price pressures prove enduring, the economic landscape in the U.S. differs significantly from that in many other nations. The U.S. currently experiences a lower inflation rate and a greater amount of available resources compared to most other major economies.
Furthermore, commodities constitute a relatively small portion of the overall consumption basket in the U.S., which clarifies the historically low pass-through of commodity prices into core inflation measures over the past several decades.
According to a recent report from the U.S. Bureau of Economic Analysis, personal income and consumer spending both experienced an uptick in January. This development reinforces positive expectations regarding two fundamental components of the economy. However, one must consider the nuances of the data. The impact of unrest in the Middle East and the subsequent increase in energy prices may alter consumer behavior, potentially rendering February’s figures less relevant. Additionally, the rise in income primarily stemmed from a recent reduction in payroll taxes that took effect last month. While this is certainly beneficial, it does not equate to widespread wage increases across businesses.
James Surowiecki’s The Wisdom of Crowds
