PIMCO managing directors discuss the December Fed announcement of a 25 basis point hike in the federal funds rate, the outlook for the Fed in the coming year and the implications for investors. Key takeaways from this video:
- The FOMC (Federal Open Market Committee) decision was unanimous, and the dovish statement emphasizes how the FOMC has embraced the notion of a gradual liftoff and of looking at actual (not just projected) inflation.
- The Fed also emphasized that the rate hike cycle will need to be well underway before it begins to unwind and shrink its balance sheet.
- The tools used to tighten policy to meet the Fed’s target range will need to be tested in markets in real time.
- Markets had a fairly relaxed response to the rate hike announcement, suggesting the Fed’s communication policy over the past few months was effective.
- The Fed has embraced the idea of a lower “neutral” real interest rate that is time-varying. In this environment, investors may need to recalibrate their expectations for returns across asset classes over the longer term.
- The Fed’s rate hike does not indicate the “beginning of the end” of the current U.S. expansion.
- Even with a gradual hike cycle, the Fed will still have a very accommodative monetary policy likely into 2017.
- The Fed is comfortable with its projected path for the fed funds rate, as expressed by the “blue dots” in the Summary of Economic Projections – the median dot shows four hikes each in 2016 and 2017. PIMCO’s view is that the Fed will probably hike fewer than four times, but the dots give the Fed flexibility and optionality. Investors should be mindful of that flexibility when evaluating where to take interest rate exposure and how much to take.