Watching the Fed Watching Tariffs and Inflation

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RECORDED EPISODE:

GREG HALL: Hi everybody! Welcome to another edition of Accrued Interest, PIMCO's podcast, dedicating to serving the financial advisor community and their clients. Today we have a really, really special program that I can't wait to get to. My name's Greg Hall. I'm the head of Wealth Management here at PIMCO. My co-host for today is Cory McNamara. Cory has, originally, I think, from Cincinnati, Ohio. Do I have that right? But today you live in an another prominent river town Philadelphia, Pennsylvania, where you cover that market and south New Jersey for us, right? Lots of, yeah, yeah, another big win for Philadelphia, for...

RICH CLARIDA: Sure.

GREG HALL: Yeah! Yeah! First the Super Bowl, Now you get to be on a podcast. Your parents must be so proud. It just keeps going, stack up. It just keeps going. Well, Cory here is of course here to represent the voice of the financial advisor and to represent his clients in that region. But let me get to our main event here. We're joined by Rich Clarida, who is a Managing Director and Senior Economic Advisor here at PIMCO. Rich has a, a fine, fine career of service not just at PIMCO, but to our country as well, having served as Vice chair of the Federal Reserve, multiple stints in the Treasury Department as an advisor to Presidents on economic issues. And he leads our investment forum process here at PIMCO, which I'm gonna ask him to speak about in a little while. But Rich, welcome and thank you for joining us. You bet.

RICH CLARIDA: Looking forward to it.

GREG HALL: All right. Well, let me, I wanted to start a little bit just to kind of, to just to ease our way into economic topics here. 'cause there's a a lot to talk about right now. And we're recording this on February 18th. Just to situate everybody. But Rich, maybe you could just give us a sense of your career path the things that you've done, the experiences you've had, how you came to PIMCO, how you've managed to stay with us, as long as you have.

RICH CLARIDA: Well, sure. I've been doing this a long time. So I was, I grew up in the heartland Illinois, downstate Illinois, a little coal mining town. I was an Econ major in college and was really lucky. I knew what I wanted to do. I wanted to be an economist and economics Professor. So I studied, did my graduate work at Harvard, and then really had 20 year career as an economics Professor, mostly at Columbia. I did have a chance to work in Washington, DC during the Reagan administration on the Council of Economic Advisors.

And I sort of got the bug to want to come back to public service. And then had an opportunity, as you mentioned, to serve as Assistant Secretary of the Treasury 20 years ago in the George W. Bush administration. And then a couple of years after that got a phone call to interview for a position at PIMCO. And that was now 19 years ago. And so I've been at PIMCO, I was at PIMCO from 2006 till 2018. Went to the Fed as Vice Chair and then returned about a year or so after my term finished up at the Fed. I've been back since since then.

GREG HALL: So you spent 12 years at PIMCO. Took a quick break to be Vice Chair of the Fed for four years, and then came back.

RICH CLARIDA: Exactly.

GREG HALL: Right. And you're still a Professor at Columbia, right?

RICH CLARIDA: And I still teach a course up at Columbia.

GREG HALL: Alright. So you've managed to keep that vein of education. And, you know, running throughout. And of course, that'll be helpful. You know, I think for us today, as we look to impart some wisdom to listeners. You know, another area that I did want to spend a little bit of time on here upfront you run our secular investment forum, each year, and it's a really, it's a very special tradition of PIMCOs. It's how the whole firm comes together to formulate an investment viewpoint over a relatively long timeframe. I thought maybe you could go into that tradition a little bit, talk about how we do that and what you think maybe sets it apart from other decision making processes you've been involved in.

RICH CLARIDA: It is, you know, it's really been an integral part of PIMCO's investment process now for more than 40 years. It was actually the brainchild of our founder Bill Gross, and the basic idea is we, a lot of firms and a lot of our competitors are trying to get an edge over the next six months, the next 12 months, and Bill's idea was, let's carve out one week a year where we bring together all the investment professionals from around the world and try to look ahead three to five years to identify trends or changes in economic policy in markets in the global economy, and try to identify those trends before other folks do, and also try to identify trends that have been playing out that may, that may unwind during that time. You know, it's an all of PIMCO effort.

And it draws on not only portfolio management, but client facing and product. And then it's a big part of the way we think about interfacing with our clients, and also thinking about ways we wanna grow and improve. So I'm really proud to be part of it, it's something I started doing 10 years ago, and I was really thrilled when I came back and had an opportunity to continue.

GREG HALL: Yeah. I think it's very special, you know, particularly when you're sitting in our big meeting room in Newport Beach at our headquarters. When you see an associate or a vice president raise their hand and maybe contradict, a senior economist, a former central bank head, a former prime minister on a given point, and then the debate that ensues because it's really a no holds bar kind of environment. Cory, have you ever piped up in forum and reprimanded a senior economist?

CORY McNAMARA: No, no. I haven't had the opportunity just yet,  but I'm looking forward to that.

RICH CLARIDA: This will be your chance, this year.

CORY McNAMARA: Maybe

GREG HALL: Yeah. Yeah. Maybe on the podcast.

CORY McNAMARA: I am curious though, is this in the secular process, which is annual? Are you thinking about sort of curating the outside speakers that come in throughout the course of the year? Or like, is it, in the two months leading up to, its okay I have to get going now. How do you think about sort of riding up the docket?

RICH CLARIDA: I'm dating myself now, but in my youth, I used to watch the Macy's Thanksgiving Day parade on Thanksgiving Day, obviously in New York, you can see it yourself, but, and what they always say at every Macy's parade, or at least in those days, they said was, and you know, tomorrow we're gonna start planning for next year's parade.

And it's not quite that way, but usually the forms in May, and then May, June and July are very intense. There's a big rollout. I go to Asia for two weeks ago to Europe for a week. I go around the US and the whole PIMCO universe is out traveling, seeing clients, then take some time off in August. But usually really coming back after Labor Day in September, I'm really starting to try to put together the program. So the program's been mostly put to bed now since December...

CORY McNAMARA: ...and well in advance.

GREG HALL: Yeah. Yeah. Yeah. Yeah. Any any hints on upcoming topics for this discussion?

RICH CLARIDA: Well, obviously we're gonna be talking about US trade policy geoeconomics you know, global outlook. There's certainly enough to keep us busy for sure. And we'll have some very special speakers. We'll do the big reveal on that, probably at the end of March. So I don't wanna jinx it. Yeah.

GREG HALL: All right. We'll talk about that in the future episode. But look, I think that's actually a pretty great segue to what I would imagine is on the minds of a lot of financial advisors as, as they listen to us and as they talk to their clients on a daily basis. And  I think with you here with us, Rich, we gotta go straight, I think, to inflation, the Fed, where we are, what they're thinking. You've been on a number of podcasts recently, which I forgive you for, sitting in other venues and adding your sage advice. But what's amazing about the current environment is just the data is coming so fast and furious.

And so, you know, my fear that anything we could cover today might be dated based on what you did a couple of weeks ago. It's unfounded. We've, and just in the last week we've had a relatively hot CPI print a relatively cool retail sales piece of data. So, you know, open-ended question for you is where do you think we are in the cycle at this point? Are we getting any clarity on the path of inflation?

RICH CLARIDA: Sure. Well, I think context here is relevant. So three years ago, we were not in a good place. Inflation was running at 9%. The Fed was behind the curve. You know, it wasn't at all obvious if the Fed would be able to get inflation down to 2%. It wasn't obvious how high rates would have to go. And it wasn't obvious what the collateral damage would be, recession, unemployment.

And so you fast forward to today with that context, inflation's has declined substantially. It's running about two point a half percent. We not only avoided a recession, we had two consecutive above trend growth years. Obviously strong gains in productivity, strong gains in consumption. And so all in, I think going into 2025 is a very positive set of initial conditions. You know, that said inflation is proving to be a little bit more sticky and stubborn than the Fed hoped.

You know, a year ago, the Fed was thinking, by now, inflation would be running, its preferred measure would be running under two and a half. And the core measure of its preferred index is running about 2.8. And moreover, there's additional uncertainty. You know, there's always uncertainty. I learned firsthand during my four years as vice chair, there are always plenty of things to worry about when you're a Fed official, but there's an especially long list right now. So we have potentially dramatic changes in trade policy and tax policy, in regulation, deregulation and immigration. And so the Fed is right now has cut rates. They cut rates one percentage point last year at the most recent meeting in January They were on hold, as I've been saying, really for some time to our clients really since December.

You know, I think Jay Powell and the Fed bought optionality In December, if they want to be on the sidelines all year, you know, they can be. They're gonna be data dependent. And so I think the, our, the PIMCO baseline outlooks are sort of the center of gravity of our thinking is growth slows down a bit, maybe to roughly a trend pace of 2%. Inflation continues to decline, but the pace of decline will depend in part on what we see in terms of tariffs. And another thing we're also focused on, maybe  I'll finish on this is, uncertainty itself can be a macroeconomic factor. So we talk about what does it mean to have a tax cut or a tariff, okay, you can look at that.

But there's also, what about the uncertainty over the details of tax and tariff policy? That can also be a macro factor. It can be a headwind to growth. And so one of the things we try to do at PIMCO is instead of just focusing all of our attention on the baseline, we also like to look at other scenarios that may also play out. And we think by sticking to that, it helps to give us an edge and navigate through these sorts of environments.

GREG HALL: Yeah. There's a lot there. I like the last thing you said I think is really valuable and it's come up in previous conversations we've had on the pod with Dan Ivascyn, our CIO, with Marc Seidner another CIO here at PIMCO, just about the importance of having a framework, so that when the non base case scenario happens, you know, you've already thought out in advance kind of how you want to react. I have a bunch of stuff, but I wanted maybe zoom out a little bit. I remember maybe November timeframe last year, you had you know, we, you had a baseline view along with the rest of us here at PIMCO that, not to use too simple a word, but the soft landing was kind of our base case. And I think you just articulated exactly that growth has remained solid, inflation has trended down towards levels that are two point something.

But you raised the, the specter of sticky inflation where it would just take longer and longer and longer. Do you think that's the zone that we're in now? Or are you still, you know, are we just delayed gratification on the soft landing at this point?

RICH CLARIDA: No, certainly last, you know, it's easier to look backward. Certainly last year, in retrospect, the inflation did prove to be stickier. You know, than a lot of folks thought in the context of still very, very resilient growth. You know, we continue to have as a baseline, you know, this soft landing in a scenario. You know, I would also say, however and I'm more free to say this now than I was as a Fed official, you know, an inflation rate of 2.4, 2.3% you know, is essentially the same as a 2% inflation rate.

And so I don't see the Powell Fed breaking a lot of grass or disrupting the economy, you know, for that last 20 or 30 basis points if it meant raising rates. And so our view is really, the way to think about the Fed outlook is if the data improves and inflation is less sticky, they'll cut, if inflation stays stuck in the two point something range, they'll just stay on hold.

RICH CLARIDA: I do think that the hurdle for a hike is high. It's not insurmountable. But I really, and certainly Fed speak itself when they've been pressed on this, in press conferences, chair Powell was up on Capitol Hill last week for testimony. Whenever they're pressed on the sticky inflation scenario, or even maybe the, you know, the tariff scenario, they don't really talk about rate hikes, they just talk about staying on hold for longer. So I do think that's the relevant scenario right now.

GREG HALL: And that's a good boundary to have in place as we think about upside, downside risks, especially in fixed income. Just, you know, yeah, base case that unlikely to go higher on the short end. I am, we've said tariffs a couple of times, and you know, Cory, I think you'll agree that's definitely top of mind, I think for a lot of advisors right now, really probably the whole country, given the the attention that it's getting. One of the things that, and you just published a piece on this actually. It was in the FT, I think it's on our website.

We can link to it in the show notes, but I have been surprised at the degree to which the market actually seems to react with the kind of ambivalence or uncertainty to tariff announcements that is probably warranted, that there's a knee-jerk reaction that tariffs are just inflationary, 'cause they potentially increase prices, but it's a lot more nuanced than that. May, you'd be better than explaining outta than me, but I'd just be, maybe you could outline that nuance for our listeners and then we can talk about the impacts.

RICH CLARIDA: Yeah. I think I'm glad you asked that, Greg. 'cause I actually think there are two dimensions of, to the nuance. So the first nuance and the term I've used when I talk about this is markets are trying to figure out are tariffs, you know, a bargaining chip or a battering ram. And my interpretation is right now markets are very much in the bargaining chip mindset, not the battering ram. Now, of course, it can be both, but you know, to simplify you know, Trump is the art of the deal that threatening tariffs as a way to get what he wants on other policies. And, but then there's the other element of the nuance.

Well, suppose we do get tariffs. We already have tariffs on China that are in place. Steel tariffs have been announced, reciprocal tariffs, which basically means that we'll charge a tariff at the same rate of country charges on us have been also announced or signaled.

And then there's uncertainty over the details. And in particular, from the fed's point of view, and Waller, Governor Waller spoke about this just yesterday, or at least I saw the remarks yesterday is how would the Fed react to the reality of tariffs that pushed up import prices? And what Chris said, and this is also consistent with the briefings that I got as a Fed governor in 2018 during Trump 1.0, is that the initial inclination would be to look through a one-time increase in import prices from tariffs but with an important caveat or qualifier, so long as the Fed judged that inflation expectations remained well anchored, you know, back in Trump 1.0, we did have tariffs.

Now the initial conditions  were different. Inflation was below 2%, not above 2%. And if anything in that cycle, as I pointed out in the pimco.com article, is that what we saw, what the US saw, was that the trade policy uncertainty effect that was depressing activity and investment actually outweighed the tariff effect. So inflation was falling in Trump 1.0 during the tariffs, and so we cut rates.

GREG HALL: So that's actually really, if I can stop you. So the uncertainty in corporate America and making CapEx decisions...

RICH CLARIDA: ...hiring decisions...

GREG HALL: Hiring decisions, and planning for the next year was such that you saw growth slow down. That was deflationary and outweigh the inflationary impact of the tariffs.

RICH CLARIDA: Indeed. Yeah. And yeah, for sure. Yeah.

GREG HALL: But now we're, our initial conditions are different. Everybody in the country has inflation on the tip of their tongue. You know, sentiment might be a little bit more prone to extrapolate a tariff price adjustment into long-term expectations. 

RICH CLARIDA: Yeah. And just to cut to the chase from the Fed's point of view and I was confessed to our listeners, I was a charter member of Team Transitory and so, you know, the challenge in a scenario where you get big tariff increases that push up the measured inflation rate materially, if even for a short period, the risk if you're the Fed is you explain that on TV or in a press conference by saying, well, no problem, it's transitory.

And of course, you know, that didn't work out so well the last time and so that's why I do think and Chair Powell has been right in the press conferences to really highlight that they're not taking well anchored inflation expectations for granted. And so I think that's why this is an, you know, potentially a somewhat different calculus on the part of the Fed than when I was there several years ago.

GREG HALL: Is there a sense in which the Fed almost can't move? And I'm gonna struggle to articulate this, but you, to use your analogy, nobody knows if it's bargaining chip or battering ram. And that of course, if it is a strategy that's the power of that strategy is you don't get to know, in advance. The strategy breaks down if you know it's a bargaining chip.

And so if you are Chairman Powell and you are trying to determine the appropriate policy response, and you don't know if historically significant tariffs are about to be put in place, the degree to which you would feel comfortable cutting, even if the data suggested that were a possibility, it must be somewhat less. It must induce uncertainty, if you will, in the Fed itself, in terms of how they react.

RICH CLARIDA: And that you're exactly right. And I think it's even, it's compounded by the fact that monetary policy operates with long lags. And so, you know, a rate cut that could look very sensible in May could be feeding through the economy at a point when tariffs are already coming in place. And so I think that the, and this is a case in which I think the trade policy and fiscal and immigration policy uncertainty is, when I was at the Fed, it was primarily, it was showing up in the macro data and we responded to it.

Now, I think it's also potentially just a factor that is entering the Fed calculus itself. Now, again, there are scenarios where they'll cut rates and they'll look through it. I think they've said if we have a pronounced weakening in the labor market, they'll react.

But I think absent awakening in the labor market, it does mean that the hurdle in terms of improvement in disinflation, that has to be crossed before they consider a rate cut is probably higher now, than it would've been absent this uncertainty about tariffs.

Now, of course, there's also a cost in the other direction, if you say, forget the uncertainty, we think they're gonna be tariffs. I'm gonna raise rates, or I'm gonna take rate cuts off the table and say we're done. And then you don't get the tariffs, then the economy goes south because you tightened ahead of something that didn't happen. So it's definitely a relevant consideration now.

GREG HALL: Yeah. No, it's a tricky time to be at the Fed. Maybe  you feel like you wanna be back there. Maybe you're happy you're not.

RICH CLARIDA: I love doing what I'm doing, so,...

CORY McNAMARA: Okay. Rich. Does Rich, does it feel like that the March meeting is a live meeting? Or is there's still too much to tell between now and then.

RICH CLARIDA: I'll go on a limb here. I don't think it's a live meeting in terms of a rate cut. I think if there's any inkling they might cut in, in March that got taken off the table with the CPI number that we got. I think it is a live meeting in terms of what they signal for the rest of the year. 'cause in March we'll get a new set of economic projections, we'll get a new set of dots, so interest rate projections. And so it will be a consequential meeting, even though I don't expect them to do anything on rates.

CORY McNAMARA: Well, that's good because I know for certain the clients that we serve and that we're meeting with on a daily basis, one of the primary questions is certainly where is the Fed funds going? When is it a live meeting? You know, what's the ultimate trajectory this year? How many of you have sort of baked in? And that's a primary question that gets asked.

RICH CLARIDA: So the, let's just maybe put some context on that. So the last time the Fed formally updated rate projections was at the December meeting. And the center of gravity on the committee then was two rate cuts this year. That still makes sense to us as a baseline. Although we certainly see a very plausible scenario where they're on hold. But importantly at that December meeting 18 of the 19 participants at the meeting thought at least one rate cut would be appropriate.

And even now, some of the more hawkish members of the committee are still talking about rate cuts, just wanting to hold off making that decision till more data comes in. So that still seems like the baseline to us. I think in importantly, however, we are in a much different position now in terms of the yield curve than we have been in the last couple years, and now there's a positive slope in the curve. So investors who take on duration in their portfolios are actually earning some carry over and above, you know, money market rates, which was not the case for two years until recently. So...

CORY McNAMARA: Yeah! Good point!

GREG HALL: Yeah. No, and investors, I mean, you can see in the fund flow data, they're taking advantage of that, and fixed income flows have been strong year to date. And you know, the short term strategies that go out 1, 2, 3 years have been very, very strong. So advisors get that and they're taking advantage of it

With yields where they are and with value kind of returning in fixed income, and I think most crucially , with your viewpoint about there being a really high hurdle to raising rates at this point, the exact timing of when the Fed cuts  and when inflation is brought under control within reason is kind of immaterial to the investment decision.

RICH CLARIDA: Yeah. Well, especially now that the curve has a positive slope, I think that was a key inflection point last November. The other thing I'll say as well is, you know, an important reason why investors do allocate to fixed income is they earn that coupon. They earn the alpha that a PIMCO can generate, but then in an economic downturn, they earn the price appreciation when yields fall.

And one important difference between today and when I served on the Fed is in the last cycle when we hiked rates, we got the funds rate up to two point half percent and 10 year treasury yields were three. You know, well now 10 year treasury yields are in the 4.5% range. The funds rate is around 4.5%. So the Fed has a lot of room to cut in the next downturn, which means there's a lot of room for bond prices to go up in a recession scenario. So, if you will, the hedging value of quality fixed income in an investor's portfolio now, is now much more valuable than it was six or seven years ago. Just 'cause there's more traditional policy space available.

CORY McNAMARA: Can we open that up just a little bit? If we could, because I think there's been a big reversal regarding the amount of cuts that were sort of priced into the market and now what is sort of baked in over the next decade even it's much less, right? So, could you sort of expand on that, that there's maybe some benefits to owning fixed income of this environment given.

RICH CLARIDA: Well, exactly. So there's how much room does the Fed have to cut? And so that's, since the Fed has more or less said it's not going to go negative like the ECB and bank BOJ did, then that means essentially the room to cut is the level of federal funds rate. So around 4.5% right now. The second issue is how many cuts are priced in. And in September after the September meeting, which was the first cut in this cycle, and it was a 50 basis points, the markets were pricing in, you know, a destination for the funds rate of under 3%. That number now is just a touch below 4%.

So there's not only is the amount of space larger than it was before, but the amount of cuts priced in is actually even much less than it was five or six months ago. So again, that's an opportunity for an investor in a fixed income portfolio. You always wanna be positioned well when things happen that aren't priced in, so...

GREG HALL: No, that was, it is funny, it's a, we can follow this thread because the, I do think it's interesting, it wasn't that long ago that we were talking about an economy that could become fragile where the Fed didn't have any room really at all, to cut any further. And we're in a very different position today, other long term concerns. So moving away from the tactical, I think we've talked about kind of the year ahead, and I think it's pretty clear where your head is on that Rich.

Let's talk about some longer term issues, so Rich, maybe give us a couple of minutes on spending and what you think that means for the yield curve over time.

RICH CLARIDA: Yeah. So, you know, there are very few things that people in Washington agree on, but one thing they do agree on is that the US is on an unsustainable fiscal path, budget deficits of 6% of GDP in a booming economy, debt to GDP ratio north of a hundred percent. And one of the arguments we've made at PIMCO now really going back a year, in fact I published a piece on pimco.com on this in April of last year, is the markets are already starting to sniff this out in the sense that there's now pretty clearly evidence of a positive term premium built into longer maturity treasuries and corporates.

And a term premium is simply the extra reward and investor can expect to earn by taking on interest rate or duration risk.

You know, the term premium was basically squeezed out of the US government bond market and even the broader market for the decade before the pandemic, we were in a world of very, very low rates. We were in a world of negative rates in Europe, the Fed was doing quantitative easing. And so the world is now in some ways returning back to more of an or an older normal. Well, where there is this positive return, and we think a lot of, not all of it, but a lot of that is driven by the US fiscal outlook.

And bad news about fiscal policy does tend to steepen up the yield curve. You know, we're seeing that in the data. Now, I should also say that the US continued, the dollar continues to be the global reserve currency and treasuries are far and away the preferred global collateral asset.

And so, you know, there's not gonna be a buyer strike. Someone's gonna buy treasuries, but probably at a higher yield than they were willing to accept five or six years ago. We think that's largely in the current price. You know, there's a reason why treasury yields are four and a half now and not three as they were five or six years ago.

And so you have the opportunities, I said, locking in those yields, and then on top of that, active management perhaps taking on some investment grade or mortgage spread, you know, you can now easily get a high quality bond portfolio with a six plus percent, you know, coupon inflation running in the twos. That's historically a very, very attractive valuation.

CORY McNAMARA: And that's without any real cuts priced in on the horizon. So there's still potentially some coupon plus opportunities in the event...

RICH CLARIDA: Absolutely.

CORY McNAMARA: ...that the Fed has to course correct a little bit quicker, the event of a policy mistep.;

GREG HALL: But you're not overly concerned about a buyer's strike a UK Liz Truss sort of moment for the US market.

RICH CLARIDA: I don't wanna say it can't happen. Look, we had a taper tantrum back in 2013, now, 12 years ago, just based upon some confusion about Fed policy. So you can get bond market sell offs. I certainly don't wanna say to our listeners, we're not gonna get. You know, we had one in the fall of 2020, 2023 here in the US. What I'm saying though is because the treasury is the global reserve asset and the dollars of global reserve currency, there's a level at which there will be a lot of buyers.

Now, you know, that's uncertain. But, you know, one thing we have observed in the data is that when treasury yields began to peak above 5% a year ago, they quickly began to move south. And so, there is a, you know, essentially yields in the US now are very attractive to foreign investors.

GREG HALL: One topic that hasn't been as I haven't seen it in the headlines as often. I hear it around the halls of PIMCO more frequently, but it's quantitative tightening and the path there and the Fed's balance sheet. Any thoughts on what 2025 holds or a few years beyond?

RICH CLARIDA: Well, the Fed, Greg, as you correctly point out, the Fed has been doing quantitative tightening now, going on three years, it commenced in May of 2022, quantitative tightening is just reversing quantitative easing, so it's shrinking the balance sheet, not expanding the balance sheet.

The Fed in this episode, as was the case before, is doing quantitative tightening passively. It's sometimes you'll see in the press or on Twitter, the Fed's selling, Fed's not selling anything. It's just letting the portfolio roll off organically and not reinvesting when that happens. And the Fed has said something sort of vague along the lines of, it will continue quantitative tightening until it reaches a quote, ample level of bank reserves, but it hasn't defined what ample is.

GREG HALL: Very clever of them.

RICH CLARIDA: Well, yeah, and I, you know, I plead guilty having done that myself back in 2019. But there's a, the Fed has given a pretty good indication that at the current pace of runoff, they'll start thinking about ending QT later this year. But there are scenarios where the QT continues into next year. So our bet is that sometime in the second half of this year they'll bring QT to an end. But but some possibility that it does continue for a while.

GREG HALL: Yeah. And it's, maybe just another aspect of not to simplify it too much, but reloading on tools they can use in the event of another downturn. So that's another source of stability. Cory, anything else from your end that you think is high on the mind of your clients?

CORY McNAMARA: I think generally speaking, a lot of our clients are seeing the benefit of front end rates coming down as in the need to step out and benefit from extending duration. And so I think just this idea of sort of a re-acceleration of inflation that's sort of coming out of the tariff response or pro-business policies from Trump, you know, this is all front and center for our clients, and ultimately how they convey it over to their end clients, to have them feel more comfortable with taking more positions and maybe fixed income or just further out the curve.

GREG HALL: Yeah. Yeah. Yeah. I'm curious, Rich, just maybe as a final thought, you observe the policymakers you observe the central bank and you observe the markets. What do you think of the market's reactions to all of the data and the news that we've gotten on the macro economy?

RICH CLARIDA: I think broadly fair, I think, you know, for example, you can always, you know, we can always talk about the Mag seven or whatever, but the reality is, even in, if you just look at the bread and butter of the productivity statistics, we've had a run of data in the productivity of the economy, really even before the AI story start to show up in the data. That is quite positive.

You know, we have more or less we're on the verge of not having achieved a soft landing. And so there are a lot of things, a lot of positive developments. And then if you expand the sort of domain globally, you know, the US exceptionalism theme is quite relevant. And it's relevant to both fixed income and equity markets. There's a global appetite.

So I would say broadly fair, there are always going to be pockets. And, you know, at some point there'll be another pets.com where we can look back and say, what were folks thinking. But no, I'd say broadly fair. But I would also say if you look at historical evaluations, you know, fixed income now looks very, very attractive compared to many other alternatives simply so long as you're in a world where inflation's gonna be in the toss, and central banks have their credibility valuations are relevant. They're not everything in markets, but valuations are relevant and they're very, very compelling now for fixed income, that's for sure.

GREG HALL: Well, I think that's a great note for us to end on. And actually that exact note is one that, maybe the subject of a coming podcast, because a couple of our colleagues have just, are working on a paper, on that exact topic, relative valuations between equities and fixed income. So we may feature them as a special edition of the podcast in the coming week or so.

If that happens, or if it doesn't, we will definitely be back in March to talk to our portfolio manager, Jerome Schneider, about short term solutions and enhanced cash opportunities, given the theme of the day stepping gingerly out onto the yield curve. Take advantage of that positive slope. But thank you all for listening! Thank you for joining us! I think Rich gave us a terrific, you know, top down view of where he thinks the world is over the next 12 months.

Not to put words in your mouth, Rich, but relatively, we think bounded to the upside in terms of rate increases, may be bounded to the downside as data comes through lots of uncertainty, lots of opportunities for active managers to take advantage of markets. And we think, you know, similar to previous podcasts we've had with Dan and others an opportunity rich environment for the fixed income investor. With that, thank you Cory, for joining us, from the great city of Philadelphia and Rich...

RICH CLARIDA: Yeah, thank you!

GREG HALL: Can't thank you enough. Thank you very much!

RICH CLARIDA: My pleasure! Enjoyed it. Thank you!

GREG HALL: All right, we'll do it again.

CORY McNAMARA: Talk soon.

GREG HALL: As always, please visit us@pimco.com. If you identify yourself as a financial advisor, you'll be taken to Advisor Forum, which is our destination for advisors who are looking to help their clients with timely and impactful information about markets and investment opportunities. For now, I'm Greg Hall, head of Wealth Management at PIMCO. Thanks so much for listening!