What is the secular outlook for the coming year and what role do bonds play as an anchor in investor portfolios?

In our 2024 Secular Outlook, “Yield Advantage^[1],” we argued that central banks had largely tamed inflation and would soon start cutting interest rates. We said risks were shifting from growth and inflation to elevated risk asset valuations. We warned that the U.S. debt was on an unsustainable path. We highlighted that the post-pandemic inflation shock and rate-hiking cycle had produced a generational reset higher in bond yields – from the historical lows of the 2010s to levels that supported a strong multiyear outlook for global fixed income.

At the risk of understatement, a lot has happened in the ensuing 12 months:

• Trump 2.0: An unprecedented agenda to redirect U.S. fiscal, regulatory, immigration, national security, and trade policies.
• DM central banks began easing cycles, but themes of a global soft landing, U.S. exceptionalism, and disinflation are faltering in the face of a burgeoning trade war.
• Elections triggered an unforeseen fiscal and defence policy U-turn in Germany.

In short, the traditional world order – in which economics shaped politics – has been turned on its head. Politics is now driving economics, especially in the U.S. and increasingly in how other countries respond.

The fragmentation of trade and security alliances will likely become an independent driver of winners and losers, business cycles, and market volatility. Moreover, industries favored by national policies are now in play based on changing administrations and regional priorities – evident in the U.S. pivot toward legacy fossil fuels and autos and Europe’s renewed focus on defense.

Our Secular Forum guest speakers this year included Robert Lighthizer, former U.S. trade representative during the first Trump administration; Roberto Campos Neto, former president of the Central Bank of Brazil; and Daron Acemoglu, MIT economics professor and Nobel laureate (see the full list of guest speakers and Global Advisory Board members here^[2]).

Navigating trade wars and the future of the U.S. dollar

While legal challenges to U.S. tariffs, if successful, could ratchet down the developing trade war, we believe elevated trade-related conflict will persist. Uncertainty about the endgame for trade policy and global security alliances has increased downside risks to global growth.

Absent sustained retaliation against the U.S., the trade war mostly lowers export demand – a disinflationary impact – for much of the world. The reallocation of China’s trade surplus to the rest of the world is a clear source of disinflationary risk. In contrast, U.S. inflation risks have risen, at least in the short term, as has the likelihood of monetary policy divergence between the U.S. and other countries.

Despite the recent decline in the U.S. dollar, we believe it would be almost impossible for the dollar to lose its dominant global reserve currency status over our secular horizon, in part due to the lack of viable challengers in markets for foreign exchange, foreign currency debt, and bank lending. The U.S. Treasury still professes to want a strong dollar, and the U.S. administration appears to be backing off from the idea of a Mar-a-Lago accord aiming to weaken the dollar.

We believe it would be almost impossible for the dollar to lose its dominant global reserve currency status over our secular horizon

But dollar bear markets are possible, over both the short and long term, reflecting historical multiyear dollar cycles. Changing policy and security priorities may alter relative global demand for U.S. and other assets – especially as overseas investors reassess their tolerance for unhedged dollar exposure.

We expect the dollar to continue to lose market share in cross-border payments as regional currency arrangements (e.g., the “mBridge” payments platform developed by China) broaden and deepen in a more fragmented world. A gradual shift away from the U.S. dollar could continue as global portfolios rebalance at the margin to more diversified allocations in risk assets.

Debt looms large

Although it is near record highs, debt remains sustainable in most developed countries. Notable exceptions include Japan, the U.S., and France, where debt is on an unsustainable long-term trajectory, even more so than last year (see Figure 1). Deficits will likely stay above pre-pandemic levels, partly due to rising interest costs.

Figure 1: Debt appears sustainable in most countries – with exceptions
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Source: PIMCO calculations, Bloomberg, and the International Monetary Fund World Economic Outlook. Note: The chart shows simple debt-to-GDP projections across G10 countries (plus Australia, New Zealand, Spain, Belgium). The projection assumes that the primary balance evolves as in the IMF projection (until 2029, after which it stays static), inflation is at target, real GDP growth at trend, and interest rates evolve along the forwards priced into financial markets as of 6 May 2025 (until 2029, after which they stay static), assuming weighted average maturity of 7 years across countries for simplicity. We adjust the IMF’s forecast for the U.S. to include the 2017 Trump tax cut extension.

However, these issues appear chronic rather than acute. We do not foresee a sudden fiscal crisis but instead expect episodic market volatility – as seen in the U.S. in 2023 and 2025, and more sharply in the U.K. in 2022. In our baseline, U.S. Treasuries remain the cleanest dirty shirt in the sovereign closet over our secular timeline, underpinned by the dollar’s reserve currency status.

Fiscal policy in the U.S., Germany, and some advanced economies may be less restrictive than we forecasted a year ago. The Trump 2.0 fiscal package is likely to widen U.S. deficits and debt beyond prior policy projections. Yet overall fiscal space remains constrained, limiting room to respond to future downturns. That said, central banks have much more space to cut rates than in the decade before the pandemic.

Despite any short-term bump from tariffs, we expect inflation to return to Fed target levels over the secular horizon. We expect the Fed to cut rates to around neutral – roughly 3% – and well below neutral in the event of a recession, including to zero if necessary.

The historical likelihood of a recession in the U.S. over any five-year period is about two-thirds, but the probability appears higher over the next five years given the current backdrop.

Shifting global economic and inflation outlooks

Outside of the U.S., major DM economies face distinct growth challenges, while EM countries are bolstered by prudent debt management but also influenced by global trade shifts and DM policies.

Europe

Eurozone growth may decelerate from around 1% pre-pandemic to about 0.5% over the next five years, weighed down by weaker demographics and slower productivity growth. The region lags in the global tech race, faces stiff competition from China, and struggles with high energy costs amid a less favorable trade environment. Germany’s shift to higher defense and infrastructure spending is significant but unlikely to be matched elsewhere.

Inflation is unlikely to return to the pre-pandemic 1% norm, due to deglobalization and higher inflation expectations, but will likely settle below the European Central Bank’s 2% target. Equilibrium interest rates will likely stay low and below the current nominal level of about 2%.

China

China’s economy is shifting to a lower growth path amid rising debt and worsening demographics. Old growth drivers – property and infrastructure spending – are giving way to policies boosting consumption, manufacturing, and technology, signaling a deliberate pivot from debt-fueled booms to sustainable, innovation-led growth.

Yet deflationary pressures and structural constraints suggest growth will remain on a slower trajectory. China remains a global manufacturing hub, but trade and geopolitical tensions cast doubt on exports as a reliable growth engine.

Emerging markets

The question of whether new risks emanating from the U.S. automatically translate into higher risk premia for the rest of the world underscores how tight the historical link between DM policy rates and EM borrowing costs can be. While the risks are clear, encouragingly, many emerging economies have maintained manageable debt levels, positioning them to weather potential headwinds.

The rise of digital currencies – including stablecoin issuers that hold increasingly large portfolios of U.S. Treasuries – highlights how quickly capital flows can evolve. As this ecosystem matures, it could reshape EM capital flows and currency management.

Potential disruptions to the base case

We are alert to potential disruptions that – while low-probability events, in our view – could fundamentally shake up our baseline secular outlook. Among them:

• Accelerated AI-related disruption. AI advances could occur more quickly than expected and show up as faster growth in GDP and productivity data. Our base case remains that the full impact of new AI large language models manifests more gradually.
• A loss of Fed credibility – stemming from a Supreme Court ruling or a chair unwilling to uphold price stability – is unlikely but would be severe, likely sparking a surge in inflation expectations and bond yields, a sharp dollar decline, and a broad sell-off in risk assets.
• U.S exceptionalism 2.0. The narrative of U.S. economic and financial outperformance relative to the rest of the world has faded this year. Yet the U.S. entered 2025 with strong productivity, tech leadership, and deep capital markets fueling consistent profit growth. With GDP growth outpacing peers by at least a percentage point, these advantages can endure. If trade and fiscal uncertainties ease, U.S. exceptionalism could reemerge.

Investment implications: Fixed income for a fragmented era

In fixed income, investors are paid to build resilient portfolios. We continue to advocate seizing the yield advantage in high quality bonds rather than chasing equities at elevated valuations.

The equity risk premium – the difference between equity yields and bond yields – is likely the main ingredient in asset allocation as it gauges the relative value between stocks and bonds. The most straightforward way to compute the premium is to subtract the real (inflation-adjusted) bond yield from the cyclically adjusted earnings yield. The Figure 2 chart shows the U.S. equity risk premium stands at zero and is exceptionally low by historical standards.

Figure 2: Equities appear expensive on an absolute basis and relative to U.S. Treasuries
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Source: Bloomberg, Robert Shiller online data, Global Financial Data, and PIMCO as of 31 May 2025. All value metrics are relative to the S&P 500 Index. The real equity yield ratio refers to the average real earnings over the past 10 years divided by the last price. The 30-year real bond yield corresponds to the yield on 30-year U.S. Treasury Inflation-Protected Securities (TIPS), backfilled with the nominal yield on 30-year U.S. Treasuries minus expected inflation. To compute inflation expectations, we estimate trend inflation according to Cieslak and Povala (2015) calibration and forecast inflation 30 years ahead.

A mean reversion to a higher equity risk premium typically involves a bond rally, an equity sell-off, or both. The same chart shows two prior times when the premium was zero or negative: in 1987 and in 1996–2001. Following the zero equity risk premium in September 1987, the stock market declined by almost 25%, while 30-year real bond yields fell by 80 basis points (bps). In December 1999, the equity risk premium reached its minimum level during the chart period, preceding an equity drawdown of almost 40% that ended in February 2003. In that same time, 30-year real bond yields fell by about 200 bps.

In addition, corporate profits relative to GDP are near historic highs. Rising tariffs and geopolitical tensions could all weigh on future profits.

Yield advantage remains compelling

Valuations point to a lower probability of equity outperformance over fixed income in part because the outlook for high quality fixed income is as good as it has been in a long time. After steep post-pandemic rate hikes, bond markets have made it to the other side: Investors can now benefit from higher yields plus potential price appreciation given central banks have ample room to cut rates.

Forecasting fixed income returns is relatively straightforward: Over a secular horizon, the starting yield on a bond portfolio can be a good guide to expected returns (see Figure 3). The yields on the Bloomberg U.S. Aggregate and the Global Aggregate (U.S.-dollar-hedged) Indexes, two common benchmarks for high quality bonds, are about 4.74% and 4.94%, respectively, as of 5 June 2025.

Figure 3: Strong link between starting bond yields and five-year forward returns
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Source: Bloomberg and PIMCO as of 30 May 2025. Past performance is not a guarantee or a reliable indicator of future performance. Chart is provided for illustrative purposes only and is not indicative of the past or future performance of any PIMCO product. Yield and return are for the Bloomberg U.S. Aggregate Bond Index. It is not possible to invest directly in an unmanaged index.

From there, active managers can seek to construct portfolios yielding about 5%–7% by capitalising on attractive yields available in high grade investments. We anticipate maintaining an up-in-quality bias.

Harnessing global opportunities through active strategies

Powerful secular forces – local currency adoption, disciplined fiscal policies, and diversified funding – are converging to create durable opportunities. Active management, with the agility to exploit country-specific nuances and relative value differences, is crucial to navigating inevitable volatility.

The opportunity to generate alpha – returns exceeding market benchmarks – is as rich as it has ever been across global markets (see Figure 4).

Figure 4: Global bond markets offer attractive and diverse opportunities
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Source: Bloomberg and PIMCO as of 30 May 2025. For illustrative purposes only. Yield to maturity (YTM) is the estimated total return of a bond if held to maturity. YTM accounts for the present value of a bond’s future coupon payments. The index proxies are the following: U.S.: U.S. Generic 10Y Government Bond Index; Germany: German Generic 10Y Government Bond Index; U.K.: U.K. Generic 10Y Government Bond Index; Canada: Canadian Generic 10Y Government Bond Index; Australia: Australian Generic 10Y Government Bond Index; Japan: Japanese Generic 10Y Government Bond Index; Brazil: Brazilian Generic 10Y Government Bond Index; Mexico: Mexican Generic 10Y Government Bond Index; Indonesia: Indonesian Generic 10Y Government Bond Index; South Africa: South Africa Generic 10Y Government Bond Index.

Many DM economies offer a combination of attractive bond yields and a challenged economic outlook, which can benefit bond investors. In addition, we see EM countries building upon their demonstrated resilience. Historically, global diversification has offered superior volatility-adjusted returns to single country portfolios. We believe that diversification is the one free lunch available to asset allocators.

The importance of duration and curve positioning

Given attractive starting valuations in fixed income, along with expected weaker growth and stabilising inflation, we anticipate being biased to run more overweight duration positions in our portfolios than has been typical in recent years.

U.S. Treasuries have provided a hedging role for portfolios in every recession dating back to World War II, given the historical inverse correlation between stocks and bonds. High quality global bond markets have provided similar properties.

A core PIMCO thesis remains that yield curves will re-steepen over our secular horizon, as investors continue to demand more compensation to hold longer-term bonds relative to cash and short-term bills. Estimates of the Treasury term premium are positive and up substantially since the decade before the pandemic. There is potential for further steepening given the budget debate in the U.S.

A core PIMCO thesis remains that yield curves will re-steepen over our secular horizon

Active management can enhance bonds’ role as a hedge through yield curve positioning. We anticipate maintaining a bias to be overweight in the 5- to 10-year part of global yield curves and to be underweight in the long end over time. That said, given rising long end real yields, we also see a limit to how much further the rise in term premia has to run.

Indeed, in the event of a sharp rise in longer-dated yields, we would anticipate significant damage to equity and credit markets – and, in turn, the foundations for a downward correction in real yields. We also expect central banks will step in and use their balance sheets if any market moves threaten broad financial market disruption.

Resilient opportunities beyond corporate credit

Credit markets offer abundant opportunities but also specific risks, demanding careful sector and asset selection and a value-driven investment approach.

The period since the global financial crisis (GFC) has been exceptional: a long expansion, fueled by massive government policy support in the wake of both the GFC and the pandemic, that rewarded aggressive lending. This contrasts sharply with the decades right before the GFC, which saw less support, greater volatility, and uneven returns in economically sensitive credit areas.

Credit spreads remain tight relative to historic averages, despite elevated secular recession potential, highlighting areas of complacency across public and private corporate credit markets. AI advances could stoke volatility, as leveraged loan and private direct lending markets feature large allocations to technology and other industries in the sights of AI disruptors. A correction in inflated U.S. equity valuations could also trigger broader risk asset repricing. Amid limited fiscal space, a genuine credit default cycle – unlike the recent “buy the dip” era – may unfold for the first time in years, catching many investors unprepared.

In a weaker growth environment, lower-quality, economically sensitive companies face risks. Elevated short-term interest rates could increasingly challenge midsize companies that borrow in floating-rate debt markets. We express caution in areas of corporate private credit where capital formation has outpaced investable opportunities, leading to potential disappointment. Stresses are becoming evident in private equity and private credit and could worsen sharply in a recession.

Some additional convergence between public and private markets appears likely over the secular horizon. However, there are meaningful barriers to stronger convergence, driven by liquidity, transparency, credit quality, and structural considerations. Active managers with broad, global capabilities spanning public and private markets can react to dislocations in value across different segments of public and private credit markets, while offering unbiased solutions that consider liquidity, true credit quality, and relative valuations to best serve investors.

Stricter bank capital and liquidity rules will likely continue to push many lending activities in the U.S. to the private credit market, especially asset-based finance. This opens opportunities for investors to act as senior lenders in areas once dominated by regional banks. We continue to see attractive opportunities in high quality areas including consumer, residential mortgage, real estate, and hard assets, where starting conditions and valuations appear favourable relative to corporate credit.

About our forums

PIMCO is a global leader in active fixed income with deep expertise across public and private markets. Our investment process is anchored by our Secular and Cyclical Economic Forums. Four times a year, our investment professionals from around the world gather to discuss and debate the state of the global markets and economy and identify the trends that we believe will have important investment implications. In these wide-reaching discussions, we apply behavioral science practices in an effort to maximize the interchange of ideas, challenge our assumptions, counter cognitive biases, and generate inclusive insights.

At the Secular Forum, held annually, we focus on the outlook for the next five years, allowing us to position portfolios to benefit from structural changes and trends in the global economy. Because we believe diverse ideas produce better investment results, we invite distinguished guest speakers – Nobel laureate economists, policymakers, investors, and historians – who bring valuable, multidimensional perspectives to our discussions. We also welcome the active participation of the PIMCO Global Advisory Board, a team of world-renowned experts on economic and political issues.

At the Cyclical Forum, held three times a year, we focus on the outlook for the next six to 12 months, analysing business cycle dynamics across major developed and emerging market economies with an eye toward identifying potential changes in monetary and fiscal policies, market risk premiums, and relative valuations that drive portfolio positioning.

By Richard Clarida, Global Economic Advisor, Andrew Balls, Chief Investment Officer, Global Fixed Income and Dan Ivascyn, Group Chief Investment Officer

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Notes:
[1] https://www.pimco.com/au/en/insights/yield-advantage
[2] https://www.pimco.com/au/en/insights/the-fragmentation-era#d28e90b3-a9d8-4441-ba01-830919070204

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Andrew Balls

In a world of insecure stability, investors must prepare for 5 policy pivots that will test markets.

In PIMCO’s recently published Secular Outlook, Pivot Points, authors Richard Clarida, Andrew Balls and Daniel J. Ivascyn explain how over the next five years, there could be up to five significant pivots in the direction and scope of the monetary, fiscal, trade, geopolitical and exchange rate policies pursued by the world’s major countries.

But while the direction of some of these pivots may be known, the path that policies actually take, their impact on the global economy and markets, and their ultimate destination are all highly uncertain.

These policy shifts will coincide and collide with the rising risk of recession in a world of insecure stability, with any pivot to fiscal policy that materializes unlikely by itself to boost global growth prospects in a sustainable way as the Federal Reserve attempts to hike rates and shrink its balance sheet.

Expansions may not die of old age, but if history is any guide, we believe the probability of a recession sometime in the next five years is around 70%.

Over our secular horizon, we see rising downside risks to the outlook for Chinese growth and eurozone stability.

Since the last Secular Forum in May 2016, the global economy has surprised on the upside, and markets have shrugged off and indeed rallied after Brexit and the U.S. Presidential election. Risk appetite has been robust, resulting in lofty equity valuations, tight credit spreads and low realized volatility.

We believe markets now look too relaxed and medium-term risks are building. In this environment, investors should consider using cyclical rallies to build cash to deploy when markets correct and risks are re-priced.

Secular pivot points with baseline outlook

• Monetary policy: We expect Fed balance sheet normalization, but less than many think, with a New Neutral destination for the fed funds rate.
• Fiscal policy: We expect that any U.S. fiscal package that passes will be tilted to tax cuts, but light on reform; we see limited fiscal space in Europe.
• Trade policy: We expect the U.S. to focus on bilateral deals (e.g., China, NAFTA) and aggressive use of existing authority within the WTO.
• Exchange rate and geopolitical policies: Amid populist movements in Europe and beyond, we expect the euro to survive and Italy to remain in the eurozone. The Chinese yuan is likely to grind weaker.

Macroeconomic risks …

• In our view, downside and upside risks are roughly balanced for the U.S.; downside risk to growth in both Europe and China is rising over the secular horizon.
• We see a significantly lower tail risk of global deflation.
• We see a risk the fed funds rate lands to the downside of New Neutral levels.
• We are monitoring the global economy’s “driving-without-a-spare-tire” risk in the next recession, whenever it happens.

… and portfolio responses

• Focus on valuation – lots of “good news” is priced in to markets.
• Maintain focus on capital preservation.
• Seek relative value in rates and credit.
• Look to a global opportunity set, including emerging markets.

The post Key takeaways from PIMCO’s Secular Outlook: Five pivot points to watch appeared first on AdviserVoice.

In July, the Fed statement acknowledged that “near-term risks to the economic outlook have diminished”‎ but omitted – as had all previous statements this year – any language on the balance of risks. In today’s statement, the Fed returns the balance of risk language, telling us that the FOMC feels that risks “appear roughly balanced.” The committee chose not to offer further calendar guidance, instead borrowing a quote from Chair Janet Yellen’s Jackson Hole speech on 26 August that “the case for an increase in the federal funds rate has strengthened.”

Much more informative about the FOMC intentions were the three dissents – by Loretta Mester, Esther George and Eric Rosengren – in favor of a rate hike at this meeting and the fact that 14 of the 17 dots in the SEP now indicate that at least one hike will be appropriate by the end of this year. Interestingly, the dot plot for 2017 now shows a median of only two hikes in 2017 compared with three hikes projected in the previous dot plot in June. And the median longer-run dot has shifted down slightly to 2.875%.

So with the obligatory “data dependency‎” caveat, this is a committee that expects to hike later this year, which would mean at the December meeting.

Yet, while the dissents and dots indicated a somewhat more hawkish tilt in the September FOMC compared with June, the dots in later years offer a more dovish tilt in terms of pace and destination. Both the statement and SEP reaffirm that this will be a very gradual liftoff. Indeed, the longer-run median dot at 2.875% resides firmly in the New Neutral framework.

By Richard Clarida, PIMCO’s global strategic advisor

The post Fed Statement: Let the dots – and the dissents – do the talking appeared first on AdviserVoice.

Soon after, a very weak payroll report on 3 June and the pending vote for Brexit on 23 June caused Fed officials – or at least the Chair – to lose confidence in their outlook. After their meeting on June 14th and 15th, they backed away from signaling a rate hike would be appropriate “in coming months.”

Since then, though, U.S. economic data have been surprising on the upside – most notably with the gangbuster employment report on 8 July which indicated that 287,000 jobs had been created in June, with a three-month average of 147,000 jobs. That was well above the roughly 100,000 jobs per month (or less) the Fed itself estimates is the new normal for the economy given the slowdown in labor force growth.

So coming into the 27 July meeting, the question was not “Will the Fed hike?” That had been taken off the table with the publication of the minutes of the June meeting. But rather, “Will the Fed recognize the stronger economic data received since the June meeting and signal a desire to hike ‘in coming months’ – perhaps in September?” In other words, would the Fed acknowledge the May payroll report appears to have been a blip and that the post-Brexit reality had not been “the Lehman moment” some had predicted, implying that a rate hike would be justified given the criteria laid out by the Chair in May?

The Fed statement did acknowledge that “the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months.” The Fed also conceded that “economic activity has been expanding at a moderate rate,” a rate faster than the very slow growth of the first quarter. Finally, and of greatest interest, the Fed did acknowledge that “Near-term risks to the economic outlook have diminished.”

That said, the Federal Open Markets Committee (FOMC) continues to state, as it did in June, that “the Committee continues to closely monitor inflation indicators and global economic and financial developments.”
Fed says economy improving but offers no guidance.

So while the Fed now appears to be less worried than it was in June about the “near-term risks to the economic outlook” and to accept that ”labor market utilization” has increased in the context of moderate, at- or above-trend growth, it is not willing to signal to markets that a hike will be appropriate in “coming months” – let alone September.

So for now, the Yellen Fed has given up on “calendar guidance” but is unwilling – or unable – to replace it with outcome-based guidance, or really any guidance whatsoever. This is a Fed that prizes “optionality” above all else.

That appears to be working for now. But options have a positive price, which so far the Fed has not had to pay. This is a free lunch that won’t last forever.

By Dr. Richard Clarida, PIMCO Global Strategic Adviser

The post The Fed: Silent on September appeared first on AdviserVoice.

And the first paragraph of the statement did exactly that. Importantly, the statement did not downgrade its assessment of survey-based measures of inflation, even though Fed Chair Janet Yellen did discuss this specifically in her 6 June speech in Philadelphia.

The rest of the statement was largely unchanged from the previous statement in April. It did not mention “Brexit” risk specifically as a factor influencing the June decision. Instead, the June statement maintains the April language that the FOMC would closely monitor “global economic and financial developments.” Neither did today’s statement say – as did the October 2015 statement – that a rate hike could well happen at the “next meeting.”

So while the June statement did not rule out July, it did not signal that a hike at the next meeting is likely. This reflects, I believe, a desire to see whether the disappointing payrolls report on 3 June was a blip or instead the start of a pronounced softening of the labor market.

Finally, I expected the “blue dots” in the FOMC’s new Summary of Economic Projections (SEP) to indicate via the median dot that two hikes are projected for 2016, and that the longer-run destination for the policy rate would shift down to 3%, and this is indeed what the June SEP shows. That said, six members of the FOMC project only one hike in 2016, and three members of the FOMC see a longer-run neutral rate of 2.75%. This places now nine members of the committee in the New Neutral camp that PIMCO has been discussing for the past two years. Finally, the FOMC also now projects only three hikes in 2017 and 2018, down from four in each of those years in the March SEP. The committee also continues to indicate that it wants to run the labor market “hot” in order to push the unemployment rate below the estimated non-accelerating inflation rate of unemployment (NAIRU) of 4.8%, its current level.

In sum, the Fed with its June statement today maintains its optionality to hike when it sees fit. But the FOMC again falls short in laying out a framework to understand or predict how this decision will be made. “Data dependence” is not a monetary policy, and the dot plot is not a reaction function. Investors in the U.S. and around the world are scrutinizing central bank policy and asking whether, over the longer term, it may be exhausting its ability to spur economic growth and inflation. That uncertainty is a major factor of PIMCO’s secular outlook of an insecure stability.

By Dr. Richard Clarida, MD & Global Strategic Adviser at PIMCO

The post Fed statement: In Yellen we trust – But markets must verify appeared first on AdviserVoice.