The Taylor rule, proposed by John Taylor, is a formula for determining the target Fed Funds rate. In the Taylor Rule, the Fed Funds rate baseline is set to the target nominal rate (target real rate plus target inflation), and then adjusted based on economic conditions. The rule states that the Fed Funds rate should be raised when inflation is higher than target inflation (“Inflation Gap”), and lowered when economic output is lower than potential output (“Output Gap”).

This chart illustrates the top ten holdings for the three indices that give investors broad exposure to the U.S. (S&P 500), Non-U.S. Developed Markets (MSCI EAFE) and Emerging Markets (MSCI Emerging Markets). The chart shows the market caps of each of the ten largest companies in the index and are listed from the largest weights (at the bottom) to the smallest weights (at the top).

The U.S. economy has strengthened substantially over the past several quarters, and at some point the Fed will have to begin removing excess liquidity and end the special programs it created to support the economy during the crisis. With the Federal Reserve’s second round of quantitative easing (QE2) set to expire in June, there has been much speculation about what will happen once QE2 comes to an end, and when the Fed will begin tightening monetary policy.

In aggregate, public pensions are approximately 75% funded (down from a high of 103% in 2000), but there is a great degree of dispersion of funding ratios on a state by state basis.

While the U.S stock market enjoyed an upward trajectory over the past 18 months, the U.S. housing market continues to experience its ups and downs. Enacted in the beginning of 2009, the American Recovery and Reinvestment Act provided a tax credit to home buyers. At the time, U.S home sales were in a freefall, but this credit helped reignite the market.

Although the broad economy has grown steadily since the beginning of 2009, the construction sector remains mired in a state of recession. Construction employment peaked at the end of 2006 as the housing bubble began its collapse. Currently, the unemployment rate of the construction sector stands at 21.8%.

As investors raise questions surrounding the prospects of both stocks and bonds as we head into the Summer, a useful exercise can be looking at the historical valuation of the two asset classes in relation to one another. A variation of Dr. Ed Yardeni’s Fed’s Stock Valuation Model can be used as a simplistic gauge of the relative valuation between the two asset classes.

The Fed recently completed its latest stress tests on banks. Based on the results, many banks were given the green light to increase dividend payouts as well as announce share buybacks. With this in mind, our chart of the week looks at the charge off rates and delinquency rates of loans at all commercial banks.

Over Monday and Tuesday of this week the Nikkei 225 (major Japanese stock market index) fell 16.1% – dropping from 10,254.43 on March 13th to close at 8,605.15 on Tuesday.

This week’s Chart of the Week shows the percentage changes in the Consumer Price Index and Unit Labor Costs (the average cost of labor per unit of output) since 1950.

This week's chart examines the peak employment level (total number of people working in the U.S. labor force), along with the time taken to return to that peak level after a recession.

As commodity prices around the globe continue their steady march upward, convention would suggest that inflation in the U.S. isn’t far behind. However, as many developing nations have already felt the sting of rising costs, inflation in the U.S. remains largely absent.

This week’s chart shows the relative economic size (measured as a percentage of U.S. GDP) of the top nine countries during each time period compared to the U.S. economy.

This week’s charts show the cumulative outperformance of the two Fama-French Factors, SMB and HML.

On Tuesday, February 1, the Dow Jones Industrial Average (“Dow”) closed above 12,000 for the first time in two and a half years; the index was last above 12,000 on June 19, 2008.

This week’s Chart of the Week compares inflation expectations (measured by the breakeven rate) with oil prices, to see if there really is a strong correlation between the two values.

"Jobs" and "unemployment" have garnered a lot of attention during this economic recovery, mostly because the headline numbers have been disappointing.

This week’s Chart of the Week deals with the sovereign debt crisis in Europe.