Pimco sees Fed holding rates steady for rest of 2026

Pacific Investment Management Co. expects the Federal Reserve to hold interest rates steady for the remainder of 2026, a view that puts the $2 trillion bond manager at odds with traders who had priced in rate cuts.

"The Fed is in a holding pattern, and we don't see the data that would force a move in either direction," Jerome Schneider, head of short-term portfolio management at Pimco, said on Bloomberg Television.

The Fed under new Chair Kevin Warsh held rates steady at the June meeting, with half of the 18 Federal Open Market Committee members projecting rate hikes this year. Inflation remains the central obstacle: the Fed's preferred gauge, the personal consumption expenditures price index, is hovering around 4%, double the central bank's 2% target. Warsh has declined to offer forward guidance, replacing the Fed's traditional communication style with a more reactive approach.

The stakes are high for fixed-income investors. If Pimco is right and the Fed stays on hold, yields could remain elevated, compressing returns in short-duration strategies. Warsh's five task forces reviewing everything from communication to the $6.7 trillion balance sheet suggest any major policy shift is months away.

The divergence between Pimco's outlook and market pricing reflects the deep uncertainty surrounding the Fed's path. Overnight index swaps had priced in roughly 50 basis points of cuts by year-end before the June meeting, according to data compiled by Bloomberg. Those expectations have since been pared back as Warsh's hawkish tone resonated through the rates market.

The last time a Fed chair adopted a similarly opaque communication style was under Alan Greenspan in the 1990s, when the central bank deliberately avoided telegraphing its next move. Warsh, who has explicitly cited Greenspan as a model, is reviving that playbook at a moment when inflation is proving stickier than anticipated.

"The Fed was willing to look through the tariffs, but it is losing patience after the latest round of supply shocks," Aditya Bhave, an economist at Bank of America, wrote in a note. The Iran conflict has added a fresh layer of complexity, pushing energy costs higher and complicating the inflation outlook.

For Pimco, the conclusion is straightforward: the Fed has no reason to move. "A lengthy pause is our call," James Knightley, chief international economist at ING, said. The May jobs report showed U.S. employers added 172,000 jobs, a solid number that gives the Fed room to wait. Consumer sentiment about job prospects remains bleak, Knightley cautioned, but the labor market data has not yet deteriorated enough to force the Fed's hand.

Warsh's five task forces add another dimension. One is reviewing how the Fed communicates — changes already visible in the shorter, guidance-free post-meeting statements. Another is examining productivity and the labor market as artificial intelligence reshapes the economy. The scope of the review "is likely to leave investors nervous about large changes to Fed's policy," Oscar Munoz, head of U.S. economics at TD Securities, wrote.

The fifth task force, focused on the Fed's $6.7 trillion balance sheet, could prove the most consequential. Warsh has called for unwinding the portfolio gradually, arguing that the Fed's large footprint in bond markets "disproportionately helps those with financial assets." But shrinking the balance sheet without reducing reserve demand "would cause significant disruption in funding markets," Joseph Abate, a U.S. interest rate strategist at SMBC, wrote.

The next Fed meeting is scheduled for late July. If the data between now and then shows inflation moderating, the case for a hold strengthens. If the Iran conflict pushes energy costs higher, the hawks on the FOMC — half of whom already favor hiking — could gain the upper hand.

This article is for informational purposes only and does not constitute investment advice.