You are now leaving the PIMCO website.

Tracking pixel 1

Data Alters Market's Expectations for Peak Policy Rate But Not Outlook for Fed Cuts

Strength in employment and inflation has caused markets to raise the implied terminal rate while still expecting the Fed to normalize policy – which is different from easing – in 2024
27 February 2023
Executive Summary

Surprisingly strong recent readings for U.S. employment and inflation have been notable for causing markets to rethink the path of U.S. Federal Reserve policy in some ways but not others.

Following the latest economic data, the Fed’s terminal policy rate implied by short-dated interest rate forwards increased to about 5.3%, a level expected to be reached in the second quarter of 2023. But markets haven’t much changed the expected path of Fed rate cuts thereafter, still implying a reduction from that peak to roughly 3.65% by the end of 2024.

We think there is a reasonable narrative to support this expectation. Fed policy is currently restrictive and, over the next several months, will likely become even more so. But precisely because policy is restrictive, the threshold to normalize policy thereafter – returning it to levels that are neither restrictive nor expansionary – should not be all that high. Indeed, all it should take is for inflation to moderate. The disinflationary cycle, which is likely to accelerate in the second half of this year, will result in ex ante real short-term borrowing costs that are high by historical standards.

Markets and policymakers seem overly focused on the terms “easing” and “tightening.” Instead, we would suggest “normalizing.” This is more than semantics: Normalizing is different from returning to easy policy, as the required actions to maintain a level of restriction or neutrality are very different than actions to stimulate aggregate demand. We continue to think the bar to outright policy easing remains high. It’s likely to take a more pronounced recession.

Surprise and revise

Following the latest Federal Open Market Committee (FOMC) meeting on 1 February, Fed Chair Jerome Powell said the divergence between the path of the federal funds rate as implied by forward rate contracts and Fed officials’ latest Summary of Economic Projections from December was likely the result of “the market’s expectation that inflation will move down more quickly.”

And, indeed, after subsequent Labor Department data for January showed U.S. jobs growth had surged while U.S. inflation had surprisingly accelerated, the bond market priced in a greater chance of a higher fed funds rate. The yield on the fed funds futures contract expiring in June 2023 rose to about 5.3%, roughly in line with the median path projected by Fed officials.

Nevertheless, the market curve remains inverted, with yields on longer-dated fed funds futures trading below those of shorter-maturity contracts. That shows markets still assign a relatively high probability to Fed cuts in 2024 and beyond.

The FOMC’s projections released last December show a median expectation of a fed funds rate between 4% and 4.25% in 2024, indicating that the Fed itself agrees with the direction of normalization. That said, the range of expectations from FOMC members is 3.125% to 5.625%, highlighting the level of uncertainty. 

The options market expects the Fed may cut rates even more than officials project. According to the Secured Overnight Financing Rate (SOFR) options market, which is more liquid than the fed funds market, the implied probability that the policy rate would be below the FOMC’s 4.1% median in 2024 was close to 50%, at the time of this writing – only down marginally from the roughly 60% probability implied at the time of the 1 February FOMC meeting. (For more, see our blog post, “Disappointing Details in January CPI Report May Give the Fed Room to Maneuver.”)

Persistent cuts

Why then has the market’s pricing of the Fed rate path, and the probability of cuts in particular, been so persistent? We see one more main reason.

Given monetary policy appears increasingly restrictive, the current fed funds rate level is likely not sustainable for the medium term, and eventually the impact of higher rates will slow aggregate demand and cool inflation. In our view, it’s not a matter of if this will happen but when, and at what rate level.

Historically, the lag through which monetary policy impacts the economy was thought to be 12 to 24 months. To be sure, the lag this time could be affected by unique factors including the pandemic, a potential near-term reacceleration in global activity after Europe narrowly avoided recession over the winter, and China’s relaxed COVID-19 restrictions. But applying this rule of thumb, we should expect to see clearer evidence of weaker demand by midyear – consequentially when the yields on futures contracts also peak.

The lagged economic effects of higher rates and restrictive policy also likely explain why, historically, the Fed hasn’t stayed at a peak terminal rate level very long. Data since the 1980s suggest the Fed has held steady after a hiking cycle for around seven months on average, and for less time during inflationary cycles. Furthermore, when the Fed did start cutting, it did so by an average of 230 basis points in the year after the cuts started.

Normal isn’t easy

Given this backdrop, it is not surprising that market participants see an elevated probability that the Fed’s terminal pause is similarly short-lived and that rate cuts will soon follow. For the Fed to normalize policy, all we would likely need is for inflation to come down – not a recession.

Again, however, normalizing is different from easing. And there is one other key implication of this nuance: The Fed may not alter its current quantitative tightening (QT) program when it does begin to normalize, as rate cuts wouldn’t conflict with the policy stance behind reducing the stockpile of bonds on the Fed’s balance sheet.


PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.


PIMCO Global

Change Your Location

Tell us a little about you to help us personalize the site to your needs.

Terms and Conditions

Please read and acknowledge the following terms and conditions

This website is for the exclusive use of qualified investors as defined by the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”) as well as of quasi-institutional non-qualified investors.

This website is not addressed to other non-qualified investors, such as retail investors. If you are a retail investor, please contact your financial advisor, who will inform you about PIMCO's product range. This website uses cookies and similar online tools. You will find further details about how this website uses cookies and other online tools here.

By clicking ‘Accept’, I acknowledge and agree to the terms and conditions above. I undertake to access the information contained in this web site for my personal use and not for commercial use. I confirm that I am a qualified investor as defined by the CISA, respectively a quasi-institutional non-qualified investor, but not a retail investor.


By accessing this website and the products, services, information, tools and materials that it contains or describes, you acknowledge that you have understood and accept the following terms and conditions of use. Please read these terms and conditions of use carefully before using this website. PIMCO (Schweiz) GmbH, Brandschenkestrasse 41, 8002 Zürich, is responsible for the activities carried out through this website. You may use the materials on this website solely for personal, informational and noncommercial purposes. All rights not expressly granted in these terms and conditions of use are reserved by PIMCO.

This website only includes information on the PIMCO Global Investors Series plc funds and , PIMCO ETFs plc funds which are currently registered with FINMA for offer to non-qualified investors in Switzerland (the “PIMCO Funds”). It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction. The prospectus and key investor information documents (KIIDs), the articles of association as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland. Swiss representative and paying agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The Fund's country of origin is Ireland.


The information contained in this website constitutes an advertisement within the meaning of Article 68 of the Swiss Financial Services Act ("FinSA") for the PIMCO Funds.


The information contained in this website is not intended as an offer to sell securities or a solicitation to buy PIMCO Funds. The goal is to provide general information on PIMCO Funds that have been authorised for sale in Switzerland and are available for investment and purchase in Switzerland. This site is not directed to individuals or organizations for whom such offer or invitation would be unlawful or prohibited.

PIMCO Europe Ltd, its subsidiaries, affiliates or subsidiaries, including PIMCO (Schweiz) GmbH (hereinafter collectively "PIMCO") assume no responsibility for the financial or other consequences arising from the subscription or purchase of the securities described in this website.

The information presented in this website is based, among other things, on market data at a given time, that is therefore subject to market changes and may change from time to time. Although the information contained in this website is from sources deemed reliable, no guarantee is made as to its accuracy, completeness or reliability. No warranty or representation is made in respect to the information contained in this website including without limit that the information is accurate, complete or timely, except for information concerning PIMCO Funds. PIMCO only warrants that the information contained and opinions expressed in this website are accurate at the date of publication. The price of shares of the PIMCO Funds contained in this website is indicative only and should not be relied upon for dealing purposes.

Users should ensure that they are legally allowed access to this website in the country from which they connect.

You must read the relevant prospectus for the Global Investors Series Plc ("GIS") for all the relevant risk factors pertaining to each sub-fund.

Investment in collective investment in transferable securities involves risks. Performance is shown gross of withholding tax. The source of performance data is PIMCO. Past performance is no guarantee for future results.


The information contained in this website may constitute a purchase or sale of financial instruments within the meaning of Article 3 let. c ch.1 FinSA, triggering the FinSA rules of conduct. PIMCO is however not required to assess the appropriateness and suitability in accordance with FinSA as it does not give investment advice.


No investment advice, tax advice, or legal advice is provided through this website, and you agree that this website will not be used by you for these purposes. No representation is given that shares, products, or services identified on or accessible through, this website are suitable for any particular investor. You acknowledge that your use of this website and any requests for information are unsolicited.


The information on this website does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.


Past performance is no guide to or guarantee for future returns. Please note that the price of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. Income receivable may vary from the amount of income projected at the time of making the investment.

For a complete list of risk factors, you should refer to the prospectus of the relevant PIMCO Funds.


For details of how we might collect and use your personal data collected through our website, please see our Privacy Notice.


"Cookies" may be stored on your computer for easy navigation. A "cookie" does not allow us to identify you, but stores information about navigation through our website (such as pages already visited, time and date of visit) which we can remember during the user's next visit to our website in order to improve your browsing experience. You can find out more about how we use cookie data in our Cookie Policy.


For your safety and ours, conversations with the staff of PIMCO may be recorded. In case of dispute related to these conversations, records of phone calls can be admitted as evidence in court or other legal process to the extent permitted by applicable law.


PIMCO is not responsible for hypertext links to other sites, in particular as regards the content of these sites, advice and information provided by the authors of these sites for the subscription or redemption of securities, or in respect of subscriptions and redemptions of securities through such third party sites.

PIMCO is not responsible for hypertext links to this site. The creation of such links is prohibited without the prior express permission of PIMCO.



PIMCO makes no warranty or representation that this website can be accessed at all times. This website may, without notice, be temporarily unavailable or restricted for administrative or other reasons.

You will indemnify PIMCO (including their affiliated or associated companies) and their officers, directors, employees and agents in respect of any third-party claim for any injury, loss, damage or expense occasioned by or arising directly or indirectly from your operation or use of this website or your supply of information to a third party provided in breach of any of your obligations under these terms and conditions of use.

This website is not designed for the transmission of time sensitive instructions or questions. If you transmit any communication through this website to PIMCO directly or through any third-party internet or other service provider, you shall be responsible and liable for any omissions or failures that may be made while transmitting or receiving communications using this website. Furthermore, if you use this website to transmit time sensitive instructions or questions, you will be liable for any loss that may arise, and any such information is transmitted at your own risk.