Flatlining at The New Neutral


  • The Federal Reserve’s pivot to patience in January has reduced the risk of monetary overkill and raises the odds that U.S. short-term interest rates will broadly flatline within PIMCO’s long-standing New Neutral range of 2%–3% for the foreseeable future. The 20 March Fed meeting validated this outlook.
  • Meanwhile, low borrowing costs, populist pressures in many countries and the ascent from obscurity of Modern Monetary Theory all suggest that fiscal policy will become more activist in supporting demand and inflation over time.
  • However, with global growth still “synching lower” and political “rude awakening” risks abundant, we remain cautious in our overall macro positioning while focusing on specific carry (yield) opportunities away from crowded corporate cash bonds.
  • We favor agency and non-agency mortgage-backed securities (MBS), U.S. Treasury Inflation-Protected Securities (TIPS), financials and a select basket of high-yielding emerging market (EM) currencies, while being cautious on corporate credit and Italian and U.K. sovereign bonds. We are broadly neutral on duration and maintain a modest curve steepener in the U.S. In equities, we prefer high quality defensive growth.

Following roller coaster financial markets and the Fed’s pivot to patience since our previous gathering in early December, PIMCO’s investment professionals and the Global Advisory Board chaired by Ben Bernanke convened in Newport Beach in early March for our Cyclical Forum. We reassessed the macro outlook for the next six to 12 months and zoomed in on three key topics:

  • While global growth has been “synching lower” in the last three months in line with our December thesis, what are the chances that China’s stepped-up stimulus finds traction and stabilizes or even turns around Chinese and global growth momentum in the course of this year?
  • As regards monetary policy, are markets right to assume that the federal funds rate has peaked and the next move will be down, or is the Fed just pausing before resuming hikes? Relatedly, how significant is the Fed’s upcoming review of potential “makeup strategies” for past inflation undershoots?
  • Third, what about trade and fiscal policies – how disruptive or constructive will they be? Is the trade war passé? And with Modern Monetary Theory (MMT) in focus and populism a force, is fiscal policy the new monetary policy when it comes to supporting growth and inflation?

Here are our conclusions and how we position on the back of them.