Barclays sees the U.S. economic growth picking up again; Schroders thinks U.S. bonds will keep their AAA rating; Janney, Montgomery, Scott predicts precious metals prices will keep rising; and T. Rowe Price is bullish on Internet stocks. 

Michael Gapen, Barclays Capital: Chairman Bernanke: Patience is a virtue

An acceleration in headline inflation caused real consumption and output to slow in Q1 11; we believe the slowdown will prove temporary.

The FOMC decided to conclude asset purchases in June, while Chairman Bernanke said the reinvestment policy will remain into the second half of the year.

FOMC participants expect economic slack to remain elevated over the forecast horizon, suggesting the Fed will remain patient before tightening policy.

The advance release of Q1 11 GDP revealed real economic growth of 1.8%, down from 3.1% in Q4 10. The slowdown was driven primarily by a softer pace of real consumption growth of 2.7% and declines in structures investment (-21.7%) and government spending (-5.2%). Although this is a disappointing report, particularly relative to expectations after the passage of the fiscal package last December, we believe the slowdown will be temporary. The decline in real consumption growth reflects the effect of higher prices, as headline CPI rose 5.2% q/q (annualized) in Q1, double the rate in Q4, and the PCE price index jumped 3.8%. Therefore, while nominal consumption growth accelerated in Q1, the surge in headline inflation dragged real consumption growth lower (Figure 1). We forecast that headline inflation will ease notably on a q/q basis as the rate of increase in food and energy prices moderates. In addition, household spending on durable goods rose 10.6%, which does not indicate that the trend in consumer spending is taking a turn for the worse. We also believe the declines in residential and structures investment partly reflect adverse weather early in the quarter, and we look for positive contributions from both in Q2. Business investment in equipment and software, which is less sensitive to weather conditions, grew at a healthy 11.6% (Figure 2). Furthermore, government spending, which provided a 1.1pp drag on GDP, was driven primarily by an 11.7% decline in defense spending, which is unlikely to be repeated. Altogether, we continue to forecast real consumer spending and real GDP to grow 3.0% and 3.5%, respectively, in Q2 11. 

Asset purchases to end in June; reinvestment policy to remain At its April meeting this week, the FOMC declared that the current round of asset purchases will end in June, and in the press conference that followed the release of the statement, Chairman Bernanke said that the Fed will “continue to reinvest maturing securities” so that securities holdings "will remain approximately constant" into the second half of this year. In addition, he stated that allowing securities holdings to shrink through passive run-off is equivalent to a tightening of policy. This is important, since the removal of the reinvestment policy is likely to be the Fed's first step in the normalization of monetary policy and will signal that the tightening cycle has begun.

FOMC participants revised their forecasts to reflect slower growth, higher inflation, and lower unemployment in 2011, while leaving the rest of the forecast largely unchanged The consensus view of the committee is for a modest recovery, underpinned by household and business spending, that gradually returns employment and inflation to mandate-consistent levels over the forecast horizon. Regarding risks to the outlook, the committee acknowledged that higher oil and commodity prices have led to an acceleration in inflation, but participants continue to believe that such pressures should be transitory and characterize measures of underlying inflation as "subdued." Were long-term inflation expectations to become elevated, the chairman said “there is no substitute for action” and the FOMC would respond through a tightening of policy. The chairman suggested that the main risk to the outlook from the earthquake and tsunami in Japan is likely to be through disruptions in the supply chain, but he said any negative effect would be moderate and short lived. In this environment, we continue to expect the Fed to remain patient before beginning to normalize monetary policy, and we do not expect an increase in the federal funds rate until July 2012. In the Fed’s eyes, patience is a virtue that will be rewarded. Yet patience and its ultimate reward are, in part, based on FOMC participants’ view that the natural rate of unemployment is about 5.5% and economic slack remains elevated. In addressing this issue, the chairman said that estimates of the natural rate of unemployment (and potential GDP) entail a high degree of uncertainty and that these measures are subject to revision. Basing policy on forecasts of these measures, therefore, is not an exact science. He said that hysteresis, or the process by which job skills atrophy from extended stays on unemployment, is a process that happens very slowly. In addition, the central tendency of FOMC participants’ projections for the unemployment rate did not come down as much as the actual unemployment rate has since the January FOMC meeting, suggesting that members see the current unemployment rate as artificially depressed, perhaps due to perceived business cycle effects on labor force participation rates. Our own view is that the natural rate of unemployment is about 7% and that the current level of the unemployment rate sends an accurate signal about the state of labor market conditions and the level of economic slack.