PIMCO core fixed income product manager David Fisher explains PIMCO’s outlook for where interest rates are headed over the next three to five years.
One of the key concepts associated with PIMCO’s New Neutral outlook is that we expect the average level of interest rates across the yield curve to be lower in the future than it has been in the past.
- For the Fed Funds rate, we expect that the neutral level - meaning the level that is neither tight nor easy - is somewhere in the 2.0%-2.5% range. This is significantly lower than in previous cycles.
- Over the next couple of years, we think the Fed is going to raise rates towards that level. However, since they are not looking to put the brakes on the U.S. economy, we think they’re going to do so at a very gradual pace.
- If we look further out the curve, we would expect that a neutral level for the 10-year Treasury yield is about 100 basis points higher than the neutral level for Fed Funds – somewhere in the 3.0%-3.5% range.
- Lower inflation and slower economic growth should enable this historically low interest rate environment.