The Fed Considers, From David Kelly, chief market strategist, JPMorgan Funds

On Tuesday the Federal Reserve’s Open Market Committee holds its second meeting of the year to consider the direction of monetary policy. They will not lack for advice on what to do. However, the best advice is probably to do nothing, at least on the overall stance of monetary policy.

Data released last week was heartening as it showed that, despite foul winter weather, economic activity is continuing to grow in the first quarter of the year. In particular, the retail sales report suggests that real consumer spending is climbing at a better than 3% annualized rate. This increased demand—combined with better weather, pent-up demand for consumer durables, and signs that the economy is now in net job creation mode—provides some assurance that the economic recovery is gaining a stronger footing, something the FOMC will likely to allude to in its post-meeting statement.

At the same time, some numbers this week will emphasize just how far we are from a normally functioning economy. Industrial production appears to have seen very lackluster growth in February, while housing starts, at 600,000 units, remain about one million units below the long-term rate suggested by our demographics. Weekly unemployment claims also are proving to be stubbornly slow in falling, and may remain above 450,000 in the numbers due out on Thursday. Meanwhile, the index of leading economic indicators for February, while expected to post its 11th straight gain, should rise by just 0.2%, consistent with only a modestly growing economy.

In this environment, the dangers of an economic relapse and a descent into deflation are markedly greater than the risk of inflation, both in probability and in consequences. For this reason, and because of the need to further boost bank capital and bank lending, the Federal Reserve is likely to re-emphasize its intention to maintain exceptionally low levels of the federal funds rate for, in their words, “an extended period”.

A persistent risk facing investors is that an unwise tilt in monetary or fiscal policy disrupts the economy. Hopefully, this week the Federal Reserve will provide reassurance that, at least for its part, it has no intention of making such a mistake.

SLOW GROWTH, BUT IT’S GROWTH, From Bob Doll, vice chairman and chief equity strategist, BlackRock

On Friday, U.S. retail sales for February were reported to have grown at a 0.3% rate (0.8% ex-autos), suggesting that the severe winter storms will not have had as significant an impact on consumption as many feared. From our vantage point, it appears that real consumer spending will advance more than 3% in the first quarter. Among other positive news reported last week, tax revenues for February showed the first year-over-year increase since April 2008, largely due to an increase in corporate tax receipts.

We have been saying for some time that we expect the economy to be in a subpar recovery mode. Such a scenario, however, does not mean that the cyclical bull market needs to come to a close. As last week’s data shows, there is still room for positive economic surprises. Likewise, we believe there remains ample upside potential for corporate profits over the coming months and quarters. The main risk to markets, in our view, is the possibility of the economic recovery failing to become self-sustaining. The key variable, of course, is the employment picture.

With jobs still being lost on a monthly basis, it is understandable that pessimism and cynicism about the state of the economy continues to run strong. Most observers rightly believe that employment gains will need to occur before a self-reinforcing mechanism is in place to drive the economy. In our view, strong corporate balance sheets, improving profit margins and increases in business confidence mean that companies should ramp up their hiring efforts soon. Once positive employment conditions begin to clearly emerge, we expect the debate will shift to the path of Federal Reserve policy.

Looking ahead, we believe economic growth should continue to improve, which should provide a boost to investor confidence. Additionally, merger and acquisition activity has picked up strongly in recent weeks, as have corporate share buybacks, trends that help promote an equity-friendly environment. On balance, we continue to expect equity markets to endure ongoing periods of volatility, but reaffirm our belief that the cyclical bull market has further to run.

WHY WE’VE GOT NATURAL GAS, From Malcolm Gissen, co-manager, Encompass Fund

Contrary to popular perception, the U.S. has enough natural gas to make us entirely energy self-sufficient when it comes to producing electric power. And with electric cars becoming a viable means of future transportation, U.S. natural gas resources could free us from importing oil from the Arab World and Venezuela.