Three Key Takeaways From PIMCO’s Cyclical Outlook: Flatlining at The New Neutral

Following the Federal Reserve’s pivot to patience, we believe U.S. short-term interest rates are now anchored in The New Neutral. Global growth keeps synching lower, but may experience a soft landing later this year if China’s economy stabilizes and trade tensions ease. However, political uncertainties suggest a cautious overall approach to investing.

These are three key conclusions we discuss in detail in our latest Cyclical Outlook, “Flatlining at The New Neutral.”

The Fed embraces The New Neutral and revisits policy strategy

The most consequential recent development for global markets was the Fed’s pivot from projecting further gradual rate increases to adopting a patient, wait-and-see attitude on rates and signaling an end to balance sheet runoff later this year.

In addition, the Fed has now acknowledged that the current policy rate (2.25% to 2.5%) may be at or close to neutral, in line with PIMCO’s long-standing view of a New Neutral range of 2%–3%. We expect the fed funds rate to broadly flatline at the current level for the foreseeable future.

The Fed also announced it is reviewing its monetary policy strategy later this year. We expect any changes in the Fed’s framework to be evolutionary rather than revolutionary, but we would expect the Fed not only to tolerate but to welcome a moderate inflation overshoot, should it occur.

Global cycle: China is the swing factor

The slowdown of global growth over the past year despite massive fiscal stimulus in the U.S. and still-supportive monetary policies in the advanced economies illustrates that, more than ever, China is a key driver of the global cycle. The Chinese government’s deleveraging campaign and the trade conflict with the U.S. contributed to a slump in global trade growth, which in turn dragged down business confidence and investment around the world.