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Federal Open Market Committee

Gas pump. METRO photo

By Michael E. Russell

Michael E. Russell

The state of our economy reminds me of the skit performed by Bud Abbott and Lou Costello in the 1950s. Who’s on first, what’s on second, I don’t know who is on third! What a mess!

Treasury Secretary Janet Yellen admits to a series of mistakes by her department and by the Federal Reserve. President Biden is now going to Saudi Arabia to ask them to pump more oil while shutting down our own pipelines. I find it difficult to believe that inflation is only up 8.6% year over year, a statistic issued by the Fed. Gas at the pump is up 60%, meat up 62%, vegetables up 55%, air travel up 34%; I just don’t get it.

I feel like a grandparent who tries to help the kids with their math homework. It is somewhat confusing to me that 2 + 2 no longer adds up to 4, etc., etc. I guess our kids are all going to become economists and work for the Federal Reserve.

I do not want to be the bearer of bad news, but I think a reality check would be in order. I will use the Federal Reserve number even though they exclude food and housing. Really! On inflation, there can be no dispute. Friday’s report that consumer prices shot up by the highest number in 40 years cannot be considered a surprise. Reports issued by the University of Michigan’s consumer confidence survey showed the most downbeat sentiment on record, mainly due to historically low unemployment and soaring prices. 

It appears that notes from the Federal Open Market Committee (FOMC) indicate that Fed Chairman Jerome Powell intends to raise rates one-half percent this month and again in July. Futures also indicate another half percent increase in September.

The change in attitude at the FOMC since March is extremely troubling. The inflation numbers caught them completely by surprise.  Why didn’t they just ask people who were filling their gas tanks and shopping for food?  They sure knew that inflation was running rampant. Just a few more statistics, because Washington D.C. makes me crazy.

Larry Summers, who served as Treasury Secretary from 1999-2001, issued an economic research paper this past week. To quote, “In order to bring down core CPI to the 2% range would require the same extreme monetary restraint exerted by former Fed Chairman Paul Volcker which resulted in back-to-back 1980s recessions.” Once again there are plenty of smart people out there who have been stating that the Fed is way behind the eight ball. Example:  former Alliance Bernstein chief economist Joseph Carson has been screaming for more than a year, “The Federal Reserve is missing the boat.”

Let’s talk about stocks. The Standard and Poor’s P/E has dropped from 21 to 16. This number, 16, is normally considered to be a reasonable P/E to purchase stocks. However, if interest rates are still too low and earnings forecasts drop, don’t be surprised if there is more damage done to the stock market. The market is down 10 out of the last 11 weeks. I blame the Fed’s ineptitude in dealing with inflation, plus the war in the Ukraine and the lasting effects of the pandemic.

What do we buy? Drugs! Not street drugs, but great drug companies. The pandemic and the need to stay home and eat and eat and eat have caused a lot of us to get fat. So, let’s look at companies that make insulin. Why?  It manages blood sugar levels which help weight control. Eli Lilly (LLY) just received FDA approval for Tirzepatide for diabetes apparently with good results. Novo Nordick (NVO), a Danish company is the world’s top maker of insulin. Novo’s drug sales for obesity doubled year over year to $480 million. They are projecting a nine-fold increase in sales.

Some news that hit the wire this past week:

1. Twitter agreed to share data on false accounts with Elon Musk, thus putting the $44 billion takeover back on track.

2. Jet Blue airlines increased its offer to purchase Spirit Airlines.

3. Kohls is in talks to be purchased by Franchise Group for $8 billion.

As our parents told us, “if you don’t have anything good to say, stop talking.” On that note, please enjoy our wonderful weather. If any of our readers know how to keep the geese off the front lawn and the deer out the garden, please let me know. 

Michael E. Russell retired after 40 years working for various Wall Street firms. All recommendations being made here are not guaranteed and may incur a loss of principal. The opinions and investment recommendations expressed in the column are the author’s own. TBR News Media does not endorse any specific investment advice and urges investors to consult with their financial advisor.