All posts by joel

Economic Indicators

December Manufacturing Activity and November Home Prices and Construction

KEY DATA: ISM (Manufacturing): +1.5 points; Orders: +7.2 points/ CoreLogic Home Prices (monthly): +1.1%; Year: +7.1%/ Construction: +0.9%

IN A NUTSHELL: “The economy is ending the year on a high note with even the manufacturing sector showing signs of faster growth.”

WHAT IT MEANS: It appears that President Obama will be leaving his successor with a pretty good economy. (He can only wish the same could have been said of his predecessor.) Manufacturing has been the weakest link in the economy for a couple of years now, but that appears to be changing. The Institute for Supply Management’s reading of manufacturing activity was up nicely in December, hitting its highest level in two years. New orders surged and that led to a jump in production. Twelve industries reported increases while only four were down. There was even some additional hiring. That bodes well for Friday’s employment report. Backlogs are still disappearing, though that should change with the growing orders.

On the housing front, home prices are rising even more sharply. CoreLogic reported that their measure of housing costs rose sharply in November. The 7.1% jump from November 2015 was the largest since spring 2014. This acceleration in price increases could continue for a while, as the rise in mortgage rates seems to be forcing people off the fence, as expected. But the stronger demand is facing limited inventory, which is a recipe for price inflation.

The construction sector is also improving as activity was up across the board. Be it the private or public sector, residential or nonresidential, the value of construction put in place rose in November.

MARKETS AND FED POLICY IMPLICATIONS: The economy is in pretty good shape. Yes, it would be nice if growth was in the 3% range, but with the labor force and productivity stagnant, that would be hard to reach for any extended period. Realistically, 2.5% – 2.75% in 2017 would be really good and if it is faster, great. That would be possible if the economy is hyped by tax cuts and spending increases, but it is more likely the impacts will not be felt until the second half of the year and even more so in 2018. Also, there are risks to growth such as rising interest rates and energy prices. Ending the ACA may sound good but it could harm health care spending, slowing that sector. And, of course, a trade war would be really damaging. But that is for our politicians to sort out. For now, what we can say is that conditions are good and getting better. Investors should be pleased with today’s numbers, but they are looking ahead to major tax breaks. As long as there is hope that will happen, the markets should hold up. But eventually, budget reality has to enter the equation and the implications for the deficit are troublesome. I guess we will find out soon if the last seven years of spending controls and budget deficit reductions was a financial philosophy or a political strategy.

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November Income and Spending, Durable Goods Orders, Leading Indicators, Revised 3rd Quarter GDP and Weekly Jobless Claims

KEY DATA: Consumption: +0.2%; Income: 0%; Inflation: 0%/ Orders: -4.6%; Excluding Aircraft: +0.5%; Capital Goods: +0.9%/ LEI: 0%/ GDP: 3.5% (up from 3.2%)/ Claims: +21,000

IN A NUTSHELL: “It doesn’t look like the pick up in activity during the summer was built upon during the fall.”

WHAT IT MEANS: The economy is growing, consumers and business are spending, but happy days are not here again. That is, if you define happy days as strong economic growth. Lots of data were dumped today and they tell largely the same story. Consumer spending was up in November, but if you adjust for inflation, it wasn’t anything special. The key factor was a major slowdown in durable goods consumption, driven by a softening in vehicle sales. But it should be kept in mind that the sales pace was still robust, just not as huge as in October. It looks like consumption will be up only moderately in the final quarter of the year and that will likely keep overall growth from getting anywhere near what we had in the third quarter. Looking forward, household incomes went nowhere. Workers may be hoping that wage and salary gains will accelerate, but they actually went backward in November. Why that happened in anyone’s guess and it will be interesting to see what the December numbers look like. At least inflation remains well contained, though the Fed may not be overjoyed by that.

On the business side, demand for big-ticket items, excluding the volatile aircraft sector, was up solidly in November. Critically, business capital expenditures rose sharply. This has been a major weak link in the economy and the failure of companies to upgrade their capital stock does not bode well for future growth. If rising investment becomes a real trend, growth should accelerate. That, though, is not what we see from the Conference Board’s Leading Economic Index, which was flat in November. That came after only a modest rise in October. The modest rise in the leading indicators suggests we will not see a major surge in growth in the first part of 2017.

The third, and at least for a while, last reading of third quarter GDP showed that the economy grew at a strong pace. The revisions were not great in any major category but were largely across the board. And corporate profits were also stronger than initially thought, so firms do have the cash to invest in machinery, equipment, software and structures.

On the labor front, the surge in jobless claims is not worrisome. Trying to seasonally adjust weekly data is a thankless and pretty much impossible task, so even a few weeks of increases really mean little. Smoothing out the weekly numbers by using the four-week moving average indicates that the level of claims remains quite low.

MARKETS AND FED POLICY IMPLICATIONS: The first two months of job gains, income and spending data for the fourth quarter point to growth only in the 2% to 2.5% range. I am somewhat surprised by the consumption numbers as other reports seemed to indicate households were spending this holiday season. Maybe we will get a late surge in demand. We shall see. But the real issue is wage growth. You cannot get consumers to spend more if they don’t have the money to spend, and they just don’t have that much more money to spend. I may sound like a broken record, but that is simple math. We can talk all we want about unleashing the corporate beast by cutting taxes and revising regulations, but firms are not going to invest massively unless they see a reason to do that. With consumers not having the money to allow stronger consumption and world growth remaining modest, the proposals coming out of Washington may not add to growth as much as many are expecting. Still, the economy is moving forward at a decent pace and that is something to be happy about. On that note let me say:

Happy Holidays!

Economic Indicators

November Housing Starts and Permits

KEY DATA: Starts: -18.7%; 1-Family: -4.1%; Multi-Family: -45%; Permits: -4.7%; 1-Family: +0.5%; Multi-Family: -12.3%

IN A NUTSHELL: “Despite the sharp slowdown in multi-family construction, the housing sector remains in good shape.”

WHAT IT MEANS: When it comes to the headline number of an economic report, what we often have is a failure to communicate. That is the case with today’s home construction release. If you looked at the huge drop in housing starts and the declines across every region, you would think the sector cratered. It didn’t. What happened was the incredibly volatile multi-family sector data did what they sometimes do, which is fall (or rise) enormously. There was a nearly 50% drop in multi-family starts in November, driven by an 81% decline in the Northeast. Really? 81%? The huge national cut back came after a 75% increase in October, which followed a nearly 40% drop in September. Get the picture? Good. Smoothing out the data, for the first two months of the quarter, starts are over 6% above the third quarter rate. That implies housing could add sharply to growth in the fourth quarter. On the permit side, there was a little more stability. More importantly, permit requests for the past two months are still above starts. Also, the number of homes permitted but not started continues to rise, so there is some room for construction to accelerate.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC made its annual move this week and will not get back together again until the end of January. Unless something strange happens before then, the members will probably go back into to their usual turtle position. But that could change fairly quickly, if Congress and the new President get their act together and pass a stimulus bill. The size of that program will likely determine the Fed’s aggressiveness not only next year but in 2018 as well, when the full impacts of any tax cuts and spending increases will kick in. In November, for the first time since mid-2014, oil and gasoline prices posted an increase from the year before. It is unclear if the recent production reduction agreement will hold, but at least for a while, energy will be adding to rather than subtracting sharply from inflation. That is likely to push inflation above the Fed’s target and keep it there. If there is a significant stimulus bill, by the end of 2017, inflation could be running closer to 3% than 2%. In other words, unless the economic data tank in the next few months, and that doesn’t look likely, the markets will be focusing on and guessing about tax cuts, spending increases and regulation changes. Given that it is easier to say you are going to cut regulations than actually cut regulations, next year should be all about tax cuts and spending. (Obamacare changes, if they actually occur, are well into the future.) And since those actions greatly increase budget deficits, the most important thing may be the political calculations of the Tea Party member. Do they vote for major increases in the deficit in order to get tax cuts, or do they stick to their smaller government, smaller deficit mantra? Oh, and does anyone know what will happen to sequestration? Should be a fascinating few months and if you can tell me what will happen, we will both know and I can actually fill out my many economic forecast surveys.

Economic Indicators

November Consumer Prices, Real Earnings and December Philadelphia and New York Manufacturing Activity

KEY DATA: CPI: +0.2%; (Over-Year): +1.7%; Excluding Food and Energy: +0.2%/ Earnings: -0.4%/ Phil. Fed: +13.9 points/ Empire State: +7.5 points

IN A NUTSHELL: “Inflation is edging up and that is cutting into consumer spending power.”

WHAT IT MEANS: Yesterday, Fed Chair Yellen seemed to indicate the Fed had done its job as the labor market was pretty much at full employment and inflation was near where the Fed wanted it to be. It looks like she was right on target. The Consumer Price Index rose moderately in November, even excluding volatile food and energy. Food costs were flat but energy prices did jump. Importantly, over the year, inflation continues to move toward the Fed’s 2% target. The details, however, don’t point to any major acceleration in inflation as few components posted large gains. Even health care, especially health care commodities, was well contained. The cost of services, which is the largest component of consumer spending, continues to rise faster than commodities, though the days of declining goods prices should be over soon.

With inflation up moderately but wages oddly falling, household purchasing power declined sharply in November. I cannot explain the drop in the wage measure so I will simply report the data. This is a relatively new series so we really don’t have a good handle on what moves the numbers. Still, flat or down spending power is not positive for the economy.

Two Fed regional banks, New York and Philadelphia, reported that manufacturing activity in their regions improved markedly in December. Orders rose solidly in both districts but while Philadelphia reported improved hiring, New York indicated it softened. Most heartening was a surge in optimism in both regions.

Unemployment claims fell last week and we continue to run at historically low levels, when adjusted for the size of the labor force. Is there really any question that the labor market is pretty much out of slack?

MARKETS AND FED POLICY IMPLICATIONS: Rightfully so, the Fed Chair is proud of the work the Fed has done and she showed it at her press conference. The Fed did all the heavy lifting over the past eight years as fiscal policy restrained growth. But the reality is that interest rates are well below long-term trend levels and that is something that must be corrected before anyone can claim victory. So, what should we expect out of the Fed in 2017? Once the recent rise in energy costs is transmitted through the economy, inflation should exceed 2% for the overall index and core index. That could happen within the next couple of months. While it is likely the unemployment rate will tick up in December (the November drop was too large), it is clear from other indicators that the labor market is tight. But the Fed, especially Chair Yellen, will not believe that is the case until wage gains accelerate. The closely watched Atlanta Fed Wage Tracker is beginning to get into a more normal, strong economy range but we are still not seeing that in my preferred measure, the Employment Cost Index. It will be interesting to see what those numbers look like in the fourth quarter, which comes out on January 31, 2017. That is critical because the Fed Chair has made it clear that the members are waiting to see what the stimulus package looks like before they commit to any course of action. They are likely building some expansionary fiscal policy to be passed, which may be why they think rates will go up three times next year. But an aggressive package would change that. I think four hikes (or 100 basis points) next year would be likely with any decent-sized stimulus program.

Uncategorized

December 13-14 2016 FOMC Meeting

In a Nutshell: “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent.”

Rate Decision: Fed funds rate range increased to 0.50% to 0.75%

The Fed is starting to work like a Swiss watch: Every twelve months it raises rates whether it needs to or not, whether the economic data demand it or not. If it’s December, then the Fed is raising rates. Okay, I am being sarcastic. But the FOMC did increase the fed funds rate today, which hardly surprised anyone.

Did the Fed provide any insight into what it might do next year? Yes, but let’s not forget, last December it expected to raise rates several times this year, so believe the Fed’s forecast at your own risk. That said, the Committee’s forecast indicates the funds rate will likely be increased about three times in each of the next three years. By the end of 2019, the funds rate is expected to be about 3%, give or take 25 basis points. In other words, the expectation that rates would be increased gradually was reinforced.

As for the economy, there was some indication that the members believe inflation pressures are building a little faster than previously thought. That was signaled by the comment: “Market-based measures of inflation compensation have moved up considerably”. The word “considerably” was added. Since the choice of words is what we look for, that was really the only notable change in the statement. The description of the economy was largely the same, if a little muted.

So, what should we expect? First of all, nothing was said about the election or how the Fed may react if the proposed fiscal stimulus is implemented. At her press conference, Chair Yellen indicated that the members recognize there is great uncertainty about the extent of any fiscal stimulus. Thus, while the Fed cannot react now to something they don’t know about, they will respond once the stimulus package is passed.

In summary, the Fed raised rates today, indicated that rates will likely go up three times next year and left the door open for further increases, depending upon the stimulus package that Congress passes. As I said before, if the Trump stimulus plan is passed in any form, by the second half of next year, we could be seeing inflation nearing 3%. If that is the case, three to four increases in 2017 looks likely and if there is a major stimulus package, we could see upwards of six increases (or 150 basis points) in 2018.

(The next FOMC meeting is January 31- February 1, 2017.)

Uncategorized

November Retail Sales, Producer Prices and Industrial Production

KEY DATA: Sales: +0.1%; Excluding Vehicles: +0.2%/ PPI: +0.4%; Excluding Energy: +0.5%/ IP: -0.4%; Manufacturing: -0.1%

IN A NUTSHELL: “Higher inflation but modest consumer spending and production gains is not the recipe for an economic acceleration.”

WHAT IT MEANS: Just as I was getting all bulled up on the economy, the November data start showing up. To say the least, today’s reports were disappointing. Start with the retail sales numbers, which barely budged. All the stories coming out of Black Friday weekend and Cyber Monday were that people were shopping like crazy. Yet department store demand fell and Internet sales were up modestly. Another example of false news stories, I guess. And I thought everything I read on the Internet was accurate. Oh, well. The November vehicle sales numbers were off just a touch, but they were still at a very high pace, so the decline was nothing to be concerned about. While people may not have been shopping ‘till they dropped, they did eat until they were stuffed, which is good news for the restaurant industry.

On the inflation front, wholesale costs jumped in November. This occurred despite a decline in energy prices and we know that has reversed quite dramatically in December. Services prices are surging once again and that is only because transportation services costs are relatively tame. If energy costs keep increasing, that too could change. On the goods side, though, prices are rising more moderately. Neither consumer nor capital goods costs are going up at any great pace.

The manufacturing sector has been in a funk for about two years now and there were no signs that changed in November. Output fell again and over the year, manufacturing production is up minimally. The biggest loser was the vehicle sector, as assembly rates tumbled. Given the solid demand, that will likely turn around. But it wasn’t all motor vehicles. Sharp drops in output occurred in the machinery and electrical equipment sectors as well. In contrast, the ramping up of production in oil and gas industry continued. If prices keep rising, we could see this sector in full recovery mode.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data dump probably did little to change the thinking at the FOMC meeting. But the data do raise some questions about the speed at which the Fed will raise rates next year. While the economy is not booming, it is still growing strongly enough to keep the unemployment rate going down. That can only raise wage gains, which are already accelerating. The Atlanta Fed’s wage tracker is the highest it has been in eight years. Inflation is the key for the FOMC. Oil prices are now about 30% above where they were a year ago and in January that could go to 50%. Energy will be adding to not subtracting from inflation and the top line index will be above 2% very soon. If the Trump stimulus plan is passed in any form, by the second half of next year, we could be seeing inflation nearing 3%. If that is the case, and that is my forecast, the Fed will not raise rates just once or twice in 2017. Three to four times looks likely and if there is a major stimulus package, we could see upwards of six increases (or 150 basis points) in 2018. As I like to say, no good economy goes unpunished and real fiscal stimulus will get us a good (or at least better) economy.

Economic Indicators

November Import and Export Prices and October Foreclosures

KEY DATA: Imports: -0.3%; Fuel: -3.9%; Exports: -0.1%; Farm: +0.6%/ Foreclosures (Over-Year): -24.9%

IN A NUTSHELL: “The strong dollar is keeping inflation down, which is a challenge for the Fed.”

WHAT IT MEANS: The FOMC is going to do its annual duty of raising rates a massive one-quarter percentage point tomorrow, but the real question is: How much will the Fed hike next year? With the labor market pretty much at full employment, the only thing left is for inflation to hit the Fed’s 2% target and if energy prices remain where they are, that could happen in the next couple of months. But there is a countervailing force: the dollar. The Trump election has led to a sharp rise in the trade-weighted value and that could keep import prices down. The cost of imported products fell in November and that came even before any impacts from the higher dollar could translate into lower prices. One major factor, the fall in energy costs, has been unwound and that should lead to a rise in the energy component of the import price index this month. But even excluding energy, prices were down, though minimally. That said, over the year, non-fuel import prices are largely flat and with energy prices actually increasing, it looks like import costs could start adding to inflationary pressures. On the export side, the long-suffering farm belt is starting to see some increases in their prices. In 2015, agricultural export prices fell double-digits but will likely end up close to flat this year. Similarly, non-farm export prices will probably be up a little.

The deep pit that housing fell into when the bubble burst looks to be largely filled in. CoreLogic reported that the foreclosure rate declined sharply in October and is beginning to close in on the level seen before the bubble hit. The percentage of homes that are seriously delinquent in their mortgage payments hit the lowest rate since August 2007. We are not quite there yet, especially given the significant problems that remain in states such as New Jersey and New York, but the housing market is nearly healed.

MARKETS AND FED POLICY IMPLICATIONS: How long the dollar’s rally will continue is unclear. Irrational exuberance, at least to some extent, has likely taken hold in some of the financial markets. But a strong dollar does create some issues for the Fed, as the members seem ready to start taking seriously the task of getting rates back up to normal levels. The stronger the dollar, the lower the cost of imported goods. I think the FOMC members would love to see inflation closer to 3% than 2%. That would give them a blank check to do as they please, especially since the full employment mandate has been met. But, tomorrow is another day, which does correspond with a FOMC meeting and press conference, so let’s wait and see what comes out of that discussion.

Uncategorized

Revised Third Quarter Productivity and October Trade Deficit and Home Prices

KEY DATA: Deficit: $42.6 billion ($6.4 billion wider); Exports: -1.8%; Imports: +1.4%/ Productivity: +3.1%; Labor Costs: +0.7%/ Home Prices (Over-Year): +6.7%

IN A NUTSHELL: “Continuing the improvement in productivity will be key if growth is to accelerate.”

WHAT IT MEANS: Despite the economy expanding a little faster than initially estimated, productivity growth didn’t increase as well, though it was still solid. The rise in output per hour was the strongest in two years. However, we need to see more gains like this to have any confidence that the long period of weak productivity increases is behind us. Indeed, even with the solid increase in the summer, productivity was still flat over the year. It looks like that may be the gain for the year as well. Rising wage costs were largely offset by the gains in output and production adjusted labor costs rose modestly, though more than had been previously estimated. Labor compensation is accelerating, which does not bode well for inflation.

The trade deficit widened in October, which was not a major surprise. The surprise had been declining deficits posted during the first half of the year. Exports fell, but largely because the surge in soybean sales that powered the second quarter trade narrowing eased. There were also large declines in nonmonetary gold and artwork, neither of which point to a weakening economy. On the import side, increases in purchases of computer accessories, telecommunications equipment and consumer goods offset a drop in vehicle demand. Even adjusting for inflation, it looks like trade will restrain growth modestly in the fourth quarter.

Home prices just keep rising and rising and rising. CoreLogic’s Home Price Index jumped in October and is up sharply over the year. Texas, Florida and California powered the increase. However, the gains are not widespread as only nine states had gains at or above the national average.

MARKETS AND FED POLICY IMPLICATIONS: Business can expand by either working more efficiently or by using more workers. It is hard to get strong growth when hiring is constrained by labor availability and productivity gains are largely nonexistent. That is the growth trap that we have been in and unless something changes, don’t expect those rosy predictions of years of 3.5% to 4% growth to come true. And if companies don’t start investing more, they will be faced with increases in labor costs that are likely to require prices higher than we have seen in quite a while. The Fed worries quite a lot about productivity and while this report will be well received, the data do bounce around a lot. With compensation accelerating faster than output per worker, either earnings or prices have to give, raising questions about equity prices. The markets have been euphoric lately, but extensive fiscal stimulus in an economy nearing full employment is not a recipe for the Fed standing pat and that reality has yet to set in.

Uncategorized

November Non-Manufacturing Activity and Employment Trends

KEY DATA: ISM (NonMan.): +2.4 points; Activity: +4 points; Employment: +5.1 points/ ETI: +0.8%

IN A NUTSHELL: “It looks like the economy is accelerating.”

WHAT IT MEANS: And the beat goes on, and the beat goes on. Friday’s employment report was solid and that came on top of some very good GDP, manufacturing, consumer spending, income and confidence reports. Basically, this economy is in good shape and if the November Institute for Supply Management’s NonManufacturing index is any indicator of activity, conditions may be accelerating. The overall index rose solidly as did the business activity measure. Order growth, though a touch slower than it had, is still robust. Both import and export demand accelerated. But most impressive was the surge in hiring. Firms are adding workers like crazy and since the services segment of the economy is the leader of the pack, don’t be surprised if we get better jobs reports in the months to come.

Indeed, the strong rise in the November Conference Board’s Employment Trends Index further supports the view that the gains in payrolls we saw in November are likely to be repeated in the next few months. Growth in this measure had slowed in the middle portion of this year but it started accelerating in September and really picked up steam in November. As the Conference Board noted, “employment growth will not slow down further in the coming months”.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC starts its next 2-day meeting a week from tomorrow and neither snow, nor rain nor gloom of night are likely to stay the Fed members from their appointed round of rate hikes. Of course, once a year is hardly heavy lifting, but that should change in 2017. Even job gains as strong as we are currently seeing will cause the labor market to tighten and the forward-looking indicators point to better increases ahead. Firms can continue to resist raising wages, but if they do, they will not be able to fill the growing number of job openings. And this is all happening before any fiscal stimulus has been proposed in Congress, let alone signed into law and passed through to the economy. It is a minimum of six and more likely twelve months before we start feeling any significant impact from the proposed stimulus, whatever it turns out to be. So, when you add fuel to a slowly building economic fire, the result is inevitable: Higher wage gains, higher inflation and more rapidly rising interest rates. And that raises the next question: If longer-term rates, which are already up by 100 basis points in just five months, continue to increase and start being matched by rising shorter-term rates, what happens to the equity markets? How much further can rates rise without raising concerns about the housing market and corporate profits? Rates are still extraordinarily low, even with the recent run up, and the Fed is not expected to jam on the brakes. But the chances we will get only one or two increases in 2017 are getting smaller by the economic release. I would not be surprised if a year from now, businesses, home buyers and maybe even investors will be yearning for the good old days of low interest rates. As I like to say, no good economy goes unpunished.

Economic Indicators

November Employment Report

KEY DATA: Payrolls: 178,000; Private: 156,000; Revisions: -2,000; Unemployment Rate: 4.6% (down 0.3 percentage point)

IN A NUTSHELL: “With job growth as high as can be expected given the lack of workers and the unemployment rate near full employment, there is little reason for the Fed not to raise rates.”

WHAT IT MEANS: If it is all about jobs, and it is supposed to be, then there is little to be concerned about. The November employment report was about as good as can be expected. Yes, the total was hyped by a somewhat higher than expected rise in government employment, but there was also a surprising decline in retail jobs. Given all the reports that firms were adding seasonal workers like crazy, that drop was not expected. Manufacturers are still paring payrolls despite positive indications from the Institute for Supply Management. With qualified workers in short supply, temporary help firms are once again doing a decent business.

On the unemployment front, the rate dropped to its lowest level since August 2007. That is, we are at pre-recession levels. Even the “real” or really stupid unemployment rate is back to where it was in April 2008. In other words, all measures are near or at full employment. The labor force was down, but that bounces around like crazy. The participation rate declined as well, but it is still up for the year and where models, using demographic trends, pretty much predict it should be.

The one outlier in the report was a decline in average hourly wages. I have commented before that I really don’t know how to interpret this number as the data are less than a decade old. There is also a compositional issue in that older, higher paid workers are retiring at an accelerating pace and being replaced by lower paid Millennials. That could be biasing the number downward. Given the biggest problem firms face is finding workers, it makes not sense that wages would be declining.

MARKETS AND FED POLICY IMPLICATIONS: Payrolls expanded solidly, especially given the lack of available workers. It is not that firms aren’t trying to hire, they just cannot find qualified workers at the wages they want to pay. So don’t expect any major acceleration in job gains going forward. Yes, we can have some months with above 200,000 new workers being added, but given the slow growth in the labor force and the lack of available, let alone qualified workers, it is hard to see that there will but a major change from the current 175,000 per month trend. So, Janet Yellen needs to suck it up and raise rates on December 14th and I expect the Fed to do just that. But more importantly, the Fed members are starting to remind the world that if fiscal policy actually starts helping out, the Fed doesn’t need to keep rates at record lows. They are watching Washington carefully and no good expansionary fiscal policy will go unpunished. That is, the Fed is likely to use aggressive tax cutting and growing spending as an excuse to raise rates more than the markets currently expect. That is the warning some members are starting to give and those comments should be heeded.