Five Spot: Janus Says Fed May Spoil Party

Darrell Watters, manager of the $920 million Janus Flexible Bond Fund(JAFIX Quote), says the Federal Reserve's expansive monetary policy may stoke inflation and prompt a further decline in the dollar.

Watters, who also oversees the Janus High-Yield Fund(JAHYX Quote), has received Morningstar's highest rating of five stars for both funds. Janus Flexible Bond Fund has returned 9.6% in the past year, beating 96% of its peers. It has risen an annual average of 5.2% over five years, exceeding 92% of rivals.

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What is your outlook for the economy?

Watters: Meeting with management is a big part of our fundamental bottom-up analysis. Based on what we are hearing from management teams, we think the economy appears to be stabilizing and could show tepid signs of recovery in the second half of 2009. The U.S. economy needs job creation to materialize, which should bolster confidence among consumers. If you haven't lost your job, you have probably pulled back on consumption by a meaningful amount over fears you will lose your job or see your wages decrease.

We think the consumer will bounce back, but it will not be the conspicuous consumption we saw prior to the current recession. Higher taxes could cut into consumers' disposable income. And not just federal taxes; state and local taxes could be climbing as well, as state and local governments have been stung by lower revenues and higher spending needs. All of these signs point to a GDP growth rate of 1% to 2% by the end of the year.