You are now leaving the PIMCO website.

Tracking pixel 1

Markets Are Finally Listening to Fed’s ‘Ongoing Increases’ Message

Bond markets are pricing in additional Federal Reserve interest rate hikes, acknowledging the central bank’s emphatic resolve to tame inflation despite the likely trade-offs.
22 February 2023
Executive Summary
  • The Federal Reserve seeks to engineer what we would characterize as a “softish” (if not soft) landing for the U.S. economy in its pursuit of longer-term price stability.
  • Notwithstanding the surprisingly strong data on inflation and economic activity received so far this year, we continue to believe that the Fed in 2022 already did most of the heavy lifting it will need to do to push rates into the restrictive range needed to reduce U.S. inflation over time to its 2% objective.
  • While financial conditions have eased somewhat, the U.S. economy likely has not yet absorbed the full force of Fed tightening to date. Our base case remains a mild U.S. recession, though unemployment will very likely rise. 

It’s been a busy month  for investors and Fed watchers. On 1 February, after announcing a 25 basis point hike in the federal funds rate, the U.S. Federal Reserve went on to state that it anticipates that “ongoing increases” would be appropriate in order to move monetary policy into the restrictive range needed to put U.S. inflation on a path to return over time to the Fed’s 2% longer-run goal.

Two days later, a blockbuster U.S. employment report for January triggered an immediate repricing in bond markets toward a higher peak level for the fed funds rate. In the following week, a parade of Fed speakers led by Chair Jerome Powell consistently reinforced the “ongoing increases” message. Then last week, higher-than-expected data on U.S. Consumer Price Index (CPI) inflation and stronger-than-expected data on retail sales as well as additional remarks from Fed officials together triggered markets to price in not only the two additional rate hikes indicated by the Fed’s December 2022 dot plot (part of its Summary of Economic Projections), but also a material likelihood of at least one additional hike after that, which would bring the top of the range for the federal funds rate to 5.5%.

These developments illustrate well the interplay among data, destination, and market dynamics we are likely to experience in the year ahead as the Fed tries to engineer what we would characterize as a “softish” (if not soft) landing for the U.S. economy by ratcheting down aggregate demand growth into better balance with aggregate supply in its pursuit of its longer-run price stability mandate. Fed officials have asserted that the risk of doing too little to reduce inflation exceeds the risk of doing too much. But our view remains that they’ve already done most of the heavy lifting they will need to do before they pause rate hikes later this year, although as explained in a recent blog post by my colleagues Tiffany Wilding and Allison Boxer following the release of January CPI data, the risk is to the upside on the peak fed funds rate we will see in this cycle if progress on reducing inflation is slower than the Fed expects.

Understanding the Fed’s concerted efforts to tame inflation helps explain much of what we’re seeing in markets and the broader U.S. economy, and informs what to watch and what to expect over the coming year.

Markets repricing to projected peak rates and forward guidance

The fed funds rate last rose to 4.75% (on its way to 5.25%!) in 2006. While that’s not exactly ancient history, it’s long enough ago that markets are taking some time to adjust to a yield curve anchored at such a level. And one would have to look further back – decades – to find the last time the Fed undertook such a rapid pace of monetary tightening as it did in 2022. A crucial difference today as compared with previous major rate hike cycles is communication: The Fed has become much more transparent, offering detailed projections, targets, and guidance along with speeches, commentaries, testimony, and research.

But investors should remain attentive to the occasional episodic disconnects observed between Fed guidance and some prominent indices of financial conditions, as I discussed in a previous Viewpoint in December. While financial conditions according to some indexes have eased somewhat, recall that monetary policy operates with lags, meaning the U.S. economy likely has not yet absorbed the full force of Fed tightening to date. As Chair Powell indicated in his 1 February press conference, some of this apparent disconnect reflects investors’ collective belief (demonstrated by market pricing) that inflation levels will fall faster this year than the Fed projects.

The trade-off between inflation and unemployment amid potential recession

Amid the challenge of taming inflation, the Fed also remains focused on assessing and supporting the level of maximum employment in the post-pandemic economy consistent with its 2% inflation objective. The U.S. labor market has undergone a significant transformation since the pandemic: Labor force participation has plunged, companies struggle to fill open positions, and wage gains have been running well ahead of a pace consistent with underlying productivity and the Fed’s inflation target.

Fed Chair Powell stated on 1 February that “the labor market continues to be out of balance.” While recent data suggest wage inflation is starting to slow, some rise in U.S. unemployment is still likely to be required to return inflation over time to the 2% target. For example, the Fed’s own forecasts project that the unemployment rate could rise by 1.2 percentage points this year.

Historically, rises in the unemployment rate of this magnitude have occurred only in recessions. At PIMCO, our base case includes a recession, but all recessions are not created equal. We see no reason to believe that the growth slowdown the Fed is engineering need result in a deep and prolonged recession. For example, in the relatively brief U.S. recessions in 1990 and 2001, GDP growth in those calendar years was actually modestly positive, and the rise in the unemployment rate was roughly in line with what the Fed is projecting for 2023. If one year from now, we look back and see that GDP growth in 2023 was positive and that the unemployment rate ended the year somewhere between 4%–5%, that would likely qualify as a softish landing for the U.S. economy, even though it likely would be designated an official recession by the National Bureau of Economic Research (NBER).

Investment implications

With rate hikes largely behind us and the Fed committed to returning inflation to target over time, the investment philosophies that served many investors well prior to 2022 have become relevant again. Think of the basic concepts: diversification, active management, risk mitigation. In particular, fixed income markets are poised for attractive returns, given starting yields are at levels not seen in years. As we phrased it in PIMCO’s latest Cyclical Outlook, “Bonds are back.” We see opportunities in core fixed income, mortgage-backed securities, high quality credit, commodities, and inflation-linked bonds.

Featured Participants


All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be appropriate for all investors. Diversification does not ensure against loss.

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

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.