Interest Rates

Pimco’s ‘new neutral’ gets some pushback

Leslie Shaffer | Writer for
2% is the 'new neutral' for the Fed: PIMCO

Pimco is still hawking its "new neutral" expectations for interest rates to stay lower for longer, but some analysts are starting to express doubt.

The argument from Pimco can be compelling.

"There isn't as much credit growth as there used to be. So when the [Federal Reserve] decides it's time to raise interest rates, they'll say there isn't a lot of credit growth to rein in," meaning they don't need to raise rates as high as in the past, Tony Crescenzi, portfolio manager at Pimco, told CNBC.

"The neutral policy rate where the Fed is neither putting its foot on the pedal giving it gas or putting on the brakes is likely now 2 percent instead of the old 4 percent," he said.

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Pimco expects this will create a Goldilocks-style not-too-hot, not-too-cold porridge keeping markets on an even keel.

"Because policy rates will be stable [and] because interest rate volatility will be low, it'll be supportive of equities and credit markets," Crescenzi said. "Credit spreads can stay tight [and] equity valuations can stay high."

But some analysts question whether interest rates really will set a new, lower neutral.

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Read More'Normal' rates are different this time: Pimco

"Expectations for the neutral Fed funds rate have moved down about 80 basis points since the start of the recession," Kris Dawsey, an economist for Goldman Sachs, said in a note last week citing data from forecasting surveys. "While sizable, this move down was not proportionately larger than that seen in the last two recessions."

Dawsey doesn't believe the difference between past and future "neutral" policy rates will be drastic.

Read More Recent bond-yield creep is start of something: Pros

"We do not disagree that the Fed funds rate will on average probably be at least modestly lower over the next twenty years than it was over the twenty years preceding the crisis," Dawsey said. "However, the question of how far below the pre-crisis norm the neutral Fed funds rate may be in the long-term requires picking among many shades of gray."

If the neutral policy rate had moved drastically lower, it would suggest persistently weak demand in the economy, which doesn't seem to be the case, Dawsey said.

"It does not appear that a 'Japanification' of the U.S. economy is anticipated," the note said.

Bond yields to rise in the summer: Pro

Read MoreAre Treasury yields headed for Japanese levels?

To be sure, the benchmark 10-year Treasury yield, which takes its cues from the Fed funds rate, has frustrated broad expectations it would rise as the Fed began unwinding its asset-purchase program.

"We've been projecting since last summer 2.5-3 percent for the U.S. 10-year [Treasury]," Crescenzi said.

The 10-year U.S. Treasury yield was hovering around 2.66 percent in Asia trade Wednesday, down from around 3.0 percent in January, which was the highest level since mid-2011.

"The range will eventually shift up to 2.75-3.25 percent, but rates won't go up a lot," because lower policy rates will anchor all interest rates, he added.

Read More This is what is keeping bond yields low

But others don't expect U.S. Treasurys will remain in Goldilocks territory.

"We have some sympathy for the idea that lower rates will be sufficient to slow the economy than was the case in previous cycles," David Keeble, global head of interest rate strategy at Credit Agricole, said in a note Monday. "That is the reason why we are expecting 10-year Treasury yield peaks at not much more than 4 percent in the current cycle."

Keeble doesn't expect the current relatively low Treasury yields will persist, viewing the market as unstable.

"Bear markets for Treasurys happen fast and furiously, and in between these frenetic episodes Treasury yields languish doing not a lot at all," he said. "We are expecting another 100-basis-point-sized jump in yields before the start of hiking," he said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1