It’s not an exit strategy, but the Fed is dancing around the edges of the idea by laying the rhetorical groundwork—ever so gently—for the day when the central bank stops whistling a tune of liquidity for all. Yes, the Fed funds target rate remains at the bargain basement rate of zero to 0.25%, today’s FOMC statement revealed. In that respect, nothing’s changed. The market was anticipating no less. But the central bank was also careful to dissuade, discourage and otherwise deter the crowd from assuming that stimulus on steroids is one more government entitlement.
“In light of ongoing improvements in the functioning of financial markets,” the Fed advised this afternoon, “the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010…” It’s a start.
Actually, it’s a continuum. Ben Bernanke, chairman of the Fed and part-time op-ed columnist, wrote in The Wall Street Journal this past July that, yes, there is an exit strategy lurking somewhere in the future. What’s more, the Fed has the means and the will to pull the trigger at some point on the Great Liquidity. Or as the chairman wrote in the summer, “the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so.”
The Fed has been telling us all along that its various forms of quantitative easing will be a fleeting presence. But the emphasis has turned decidedly rigid today, if only partially, by reminding us that there’s a hard date ahead for the inglorious moment when the party ends, or begins to end. The numerous taps weren’t all turned on at once and so they won’t all close together. But close they will.
Back in June, the FOMC statement stressed that it was “extending” its monetary lifelines through “early 2010.” In a subtle but notable shift, we’re now told of an end. Extension is now being replaced by termination dates.
It’s not clear if all the various monetary denouements will be telegraphed so clearly by way of advance warning wrapped in calendrical precision. But whether the news of future finales come like a thief in the night or with full clarity days or weeks ahead of the act, a reckoning awaits.

If you absolutely, positively need an optimistic outlook on the economy, Alan Blinder’s your man.

Today’s update on consumer prices looks less threatening than yesterday’s news on producer prices for November. Whereas wholesale inflation last month was up for both headline and core readings (i.e., less food and energy), this morning’s CPI is a mixed bag. Headline CPI rose 0.4% in November (the highest since June), but core CPI was flat, on a seasonally adjusted basis. This gentle statistical profile all but assures that the Fed won’t raise interest rates at this afternoon’s FOMC announce, assuming they needed another reason to remain dovish.
“Inflation is not a problem and we do not expect it to become one anytime soon,” Brian Bethune, chief financial economist at IHS Global Insight told Bloomberg News before the CPI update. He also noted that “deflation risks have greatly diminished.” In short, we can continue to celebrate…with one eye open.
But, heck, even if this morning’s CPI report was awful, Fed Chairman Ben Bernanke couldn’t raise interest rates on a day when he was named Time magazine’s Man—make that Person of the Year, a.k.a. as “the most powerful nerd on the planet.”

Time may be running out for the policy of embracing the Great Liquidity without paying an inflationary price. A hint of things to come is buried in today’s producer price report for November.
Wholesale prices jumped 1.8% last month, the Bureau of Labor Statistics reported this morning. That’s near the upper range for monthly changes in recent years. The surge last month is easily dismissed, however, considering that much of the rise is due to energy prices. On the assumption that energy prices won’t keep rising, one could soft pedal the headline PPI number for November.
It’s harder to dismiss last month’s core PPI change, which excludes the volatile food and energy sectors. As our chart below shows, core PPI gained a hefty 0.5% in November, the highest monthly change in more than a year.

Is simply a case of statistical noise? Or is pricing pressure finally starting to rebubble as the financial crisis of 2008 continues to fade into history? Another clue arrives in tomorrow’s consumer price report.

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Say what you will about household debt and the blowback from recession, but Joe Sixpack and his spendthrift ways won’t go quietly into the night, recession or no recession.
This morning’s update on retail sales for November was a reminder that ours is a consumer economy and old habits die hard. U.S. retail and food services sales for November rose 1.3% on a seasonally adjusted basis, the Census Bureau reports. A monthly rise above 1% for this series is impressive and should soothe worries that the danger of an imminent double-dip recession is lurking. Even after excluding volatile auto sales last month, retail sales climbed 1.2%. In addition, the advance was broad based, with only a few sectors posting declines.

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Today’s update on new jobless claims for last week shows a gain in the number of freshly minted unemployed, but that doesn’t mean the general decline is over.
New filings for unemployment benefits jumped last week by 17,000 to 474,000, the Labor Department reports. But as you can see from the chart below, the overall trend has is down, albeit interrupted at times by temporary setbacks. Last week dispensed another one of those setbacks.

But barring some dramatic new and unexpected event with hefty negative consequences, weekly jobless claims are likely to drift lower in the months ahead. The economy is recovering, albeit slowly and in fits and starts, but the recovery rolls on. It remains to be seen just how durable this expansion will be, but for the moment the growth, light and tenuous as it is, has legs.

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Risk is always present, and always changing, and always surprising. Some of today’s risks may end as false alarms. Meanwhile, what seems benign, perhaps even beneficial, can bite back tomorrow. So it goes in the money game. The challenge is a) understanding the unending dynamic; and b) managing portfolios accordingly by factoring in various risk scenarios and deciding if the price of a given risk looks attractive or not.
The first step is considering the default benchmark for everyone–a global mix of all the major asset classes weighted passively. The main question is how to adjust this mix to satisfy your particular risk tolerance, time horizon while factoring in any expectations for specific risk and return among the various components. Decades of financial economics tells us no less and this two-step foundation is the analytical focus of The Beta Investment Report.
A little strategic perspective, in other words, goes a long way. It begins with calculating the benchmark, our proprietary Global Market Index, which we report monthly on these digital pages (here, for example) as well as in our newsletter, albeit in greater detail for subscribers. In the long run, this what the average investor holds, which is one reason why we pay close attention to GMI’s fluctuations and ever-changing profile. The next step is evaluating the major components of GMI in terms of how expected return and risk in the near term differs, if at all, from the implied equilibrium outlook. It’s a messy business and so we proceed cautiously, but it’s an essential step on the road for the thousand-mile journey of second-guessing Mr. Market’s asset allocation.

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The bull market in gold, now in its ninth straight year, is more than one more commodity trading at higher levels—around $1,160 an ounce, as of Friday’s close. Gold being gold, it carries a range of emotional, financial and economic baggage.
That includes the embedded warning that the risk of instability, including future inflation and banking default, is still bubbling around the world as more than a distant threat. The biggest gold bull market in modern history is also stirring arguments anew in favor of returning monetary policy to a gold standard. As alluring as that might be in concept, in practice it would be unworkable in the long run.

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All hail the arrival of zero! It’s been a long time coming—nearly two years. But better late than never.
Technically, nonfarm payrolls slipped last month by 11,000, the Labor Department reports. But in a labor force of nearly 131 million, that’s effectively no change if we consider the potential for statistical noise and the prospects for an upward revision down the line.

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Today’s update on jobless claims strengthens the case for arguing that the Great Recession is over.
New filings for unemployment benefits dipped 5,000 to a seasonally adjusted 457,000 for the week through November 28–the lowest since September 2008, the Department of Labor reports. The obvious caveat is that last week’s number is skewed to the downside because of the Thanksgiving holiday, which undoubtedly delayed and otherwise deterred the newly unemployed from paying a call to the local unemployment office.
But while should be suspicious of last week’s data point, there’s no uncertainty about the broader trend. As our chart below shows, jobless claims have been in decline since peaking in March. That alone doesn’t tell us that the economic contraction is fading, but it drops a rather large clue for thinking so when considered with a range of other economic indicators.

Anticipating the end of the recession based on looking at a general retreat in new jobless claims is a familiar notion on these digital pages. In the spring we argued that a peak in jobless claims would send a potent signal that the end of the recession was near. Calling peaks in real time is, of course, the stuff of guesswork. But now we can look back with confidence and say that new filings did indeed top out in late March of this year. That and a number of other encouraging macro signals, including the rally in the stock market, all but confirms that the recession has ended.

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