This evening at 9 p.m. EST, the President will deliver the 2015 State of the Union Address, in which he will outline what he believes is a need for a more progressive federal tax code that will afford for a redistribution of income from the wealthiest to the youngest adults.
The transfer will be achieved by way of an increase in the capital gains tax rate from 20% to 28%. The resulting expected increase in federal tax revenue is expected to pay for community college tuition, making it "free" for those students.
Although the President will also discuss the jobs that have been created during the term of his presidency, inherent in the perceived need for a wealth transfer and the planned use of the proceeds is the acknowledgment of the fact that wealth and income concentration are accelerating, and that the rate of unemployment in the youngest adult population is troubling.
This spending part of this proposal, if approved by Congress, is still just a temporary measure designed to give people something to do, until the economy rebounds with commensurate job and wage gains.
However, as I discussed in last week's column, Retail Sales Signal a Big Problem in 2015, growth in real wages have been in secular decline for 30 years, and near recessionary levels since this President was first elected in 2008.
Still, even as a temporary measure, this plan is an acknowledgement of a problem with job and income creation, which brings me to monetary policy.
Yesterday, The Wall Street Journal ran an article titled "Fed Officials on Track to Raise Short-Term Rates Later in the Year." WSJ's chief economics correspondent, Jon Hilsenrath, opens with the statement:
"Federal Reserve officials are staying on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation."
That's a mouthful. Simply put, it means that the Fed is fighting the markets, which are telling the Fed to back off on its rate increase plans.
Hilsenrath is considered to be the preferred outlet through which Fed officials communicate unofficially with the markets. When he writes about probable monetary policy decisions, it is wise to take heed.
This is setting the markets up for a confusing message with the chief fiscal leader, the President, acknowledging concerns about current economic growth and its potential with plans to attempt to stimulate, while the monetary leaders are announcing the exact opposite expectations for economic activity with plans to de-stimulate.
If the Fed indeed does not back off of its telegraphed trajectory for rate increases in the statement released following the FOMC's meeting on the Jan. 28, as Hilsenrath states, the capital markets will most probably respond more forcefully with a message back to the Fed.
That response would likely come in the form of even lower long-end yields in U.S. Treasuries, with the most logical place for the largest decline in the 10-year treasury yield.
The declining short-to-long spreads will cause net interest margins at the banks to decline, and logically cause the price of bank stocks to decline.
The Fed's continued insistence on maintaining its rate increase plan will also be reflected in further increases in the dollar index and in further declines in commodity prices, especially oil, and in the stocks of U.S.-based manufacturers and exporters.
All told, regardless of what Hilsenrath is passing on about the Fed's plans, I find it hard to believe that the Fed will not acquiesce to the signals being sent by its own bank members to back off on the plans to raise rates.
I also expect that if the Fed does not back off, FOMC members not in favor of the plan of rate increases will become more publicly vocal about it. The key officials to watch are Vice Chairman Stanley Fischer and Federal Reserve Bank of New York President, William Dudley.
The three key decision makers at the Fed and FOMC are the Chair, Vice Chair, and New York Fed Bank President, with consensus among them on policy being necessary.
As I wrote about last month in the column, As Goes Housing, So Goes Housing, both Fischer and Dudley have voiced concerns about U.S. economic potential, capital market action, and its relationship to monetary policy.
Regardless of what the FOMC releases in its statement on Jan. 28, Yellen's leadership of the Fed is facing its first big challenge.