Fed Seeks to Balance Competing Risks
At its first meeting of 2023, the U.S. Federal Reserve (Fed) faced competing priorities: how to acknowledge the progress made on inflation – and signal that rate hikes won’t go on forever – while still maintaining a sufficiently restrictive stance of monetary policy as measured across a broad range of assets. Although Fed Chair Jerome Powell repeatedly emphasized the Fed’s resolve to “not stop before the job [on bringing down inflation] is done,” his assessment of the risks of doing too much versus too little shifted toward a more balanced tone. Indeed, he even said that if inflation falls faster than the Fed’s current projections, there would be less need for restrictive policy and the Fed would also cut rates more quickly than it is currently projecting. These messages, coupled with Chair Powell’s interpretation of the current market pricing as reflecting a more benign inflation outlook than what the Fed is currently expecting, suggest that Chair Powell did not set out to aggressively realign market pricing with the Fed’s forecasts.
The Fed’s latest projections suggest it will hike twice more this year – i.e., 25 basis points at each of its next two meetings, in March and May. However, our assessment of Fed communications to date alongside our baseline for a modest recession leads us to expect one more 25 basis point (bp) rate hike in March before the Fed pauses, followed by gradual rate cuts beginning sometime in the second half of this year.
Interpreting the Fed’s guidance in light of macro developments
Little changed in the February Fed statement: Guidance on future rate hikes softened slightly from a focus on the pace of hikes to a focus on the extent of further hikes.
Following February’s 25-bp hike, the target range for the fed funds rate sits 50 bps below the median dot where Fed officials projected the rate could peak in 2023, according to the most recent (December) statement of economic projections, or SEP. However, markets are pricing the fed funds rate to end the year about 75 bps below the 2023 median dot.
This divergence between market pricing and Fed projections is part of the balancing act officials face amid economic data suggesting monetary policy tightening to date is cooling the economy against the risks stemming from inflation that is still too hot (and well above the Fed’s target). While Chair Powell tried to push back on the likelihood of rate cuts in 2023 barring a downside inflation surprise, he stopped short of clearly signaling an additional rate hike in May.
Since their last meeting in December, Fed policymakers heard further good news on U.S. inflation: Their preferred measure, core personal consumption expenditures (PCE), fell to 2.9% on a three-month annualized basis (per December data), while the latest employment reports suggest wage inflation may have peaked. Meanwhile, U.S. activity indicators have deteriorated, with consumption and manufacturing activity contracting in November and December.
Financial conditions in the U.S. have eased somewhat in light of recent positive CPI (Consumer Price Index) and PCE inflation reports – echoing similar trends in 2022 (for details, see this recent Viewpoint by Rich Clarida). With Fed officials continuing to see greater risk from doing too little to cool inflation versus doing too much, Chair Powell reaffirmed that the Fed plans to hike further as it seeks to keep financial conditions sufficiently tight.
Our forecast: One more hike
Nevertheless, given the recent weakening in various U.S. activity indicators, and the better inflation news, we believe the Fed’s pause isn’t far off. Indeed, if recent economic trends continue as we expect – we forecast a mild recession in the U.S. in 2023 – then the Fed should have enough data in hand at the March meeting to hike and signal a pause.
Please visit our Inflation and Interest Rates page for further insights on these key themes for investors.
Featured Participants
Disclosures
Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.
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
Tell us a little about you to help us personalize the site to your needs.
Select Your Location
Americas
Europe, Middle East & Africa
Location not listed? Visit our Global Site.
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.
LEGAL INFORMATION FOR INVESTORS OF Switzerland
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.
ADVERTISEMENT
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.
INFORMATION ON FINANCIAL INSTRUMENTS
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.
INFORMATION ON FINANCIAL SERVICES
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 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.
NO OFFER
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.
GENERAL RISK FACTORS
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.
DATA PROTECTION
For details of how we might collect and use your personal data collected through our website, please see our Privacy Notice.
COOKIES
"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.
RECORD OF CALLS
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.
LINKS TO AND FROM OTHER SITES
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.
LIMITATION OF LIABILITY
YOU EXPRESSLY UNDERSTAND AND AGREE THAT YOUR USE OF THIS WEBSITE IS AT YOUR SOLE RISK AND THAT THE WEBSITE IS PROVIDED ON AN "AS IS" AND "AS AVAILABLE" BASIS AND WITHOUT WARRANTIES OR REPRESENTATIONS OF ANY KIND EITHER EXPRESSED OR IMPLIED. TO THE FULL EXTENT PERMITTED UNDER APPLICABLE LAW, PIMCO EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND, WHETHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
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.