Key Points:
- PIMCO concurs with markets on the ultimate speed and distance of the Fed's path on rates, which is widely expected to be slow and shallow.
- Our base case is for the Fed to announce three rate increases in 2016. This is consistent with where the central bank's core leaders have indicated they are leaning, but greater than the two rate hikes that the bond market is priced for, which itself is instructive on how to position fixed income portfolios.
- Starting with three hikes as a baseline, we can adjust the expectation up or down primarily based on labor market trends, putting the jobs data in the context of incoming inflation data. Then we also consider financial conditions, because the movement of stocks, bond yields and the value of the U.S. dollar can all influence the U.S. economic outlook and therefore the Fed's decisions on interest rates.
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