AI spending is a big driver in the economy right now, says PIMCO's Richard Clarida

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PIMCO 8.5
Asset Manager $2100.00B
Richard Clarida 9.0

AI spending is a big driver in the economy right now, says PIMCO's Richard Clarida

yields

I expect a rate cut at the October 29th meeting and one more cut after that. We agree there is some room to get rates down to neutral (~3%), but probably will take time while inflation remains above 2%. The standard analysis is to proceed cautiously. Fed is managing downside labor risks and inflation above target suggests gradual, cautious easing towards neutral rate, dependent on next Fed Chair's policy approach.

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10/2/2025 6:11:21 PM	medium term sharp down	20 days later	-3.11%	+4.66%
9/30/2025 9:58:43 PM	short term up	5 days later	+1.36%	+1.36%
9/17/2025 10:02:22 PM	short term cautious down	5 days later	+0.39%	-0.19%
9/16/2025 9:04:34 PM	short term sharp down	5 days later	+1.64%	-2.47%
9/12/2025 11:53:46 AM	medium term cautious down	21 days later	+3.17%	-1.59%
9/11/2025 5:44:45 PM	medium term cautious down	20 days later	+0.66%	-0.33%
8/22/2025 6:06:13 PM	short term down	8 days later	+0.05%	-0.05%
8/12/2025 10:24:43 PM	short term sharp down	5 days later	+2.43%	-3.65%

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Let's begin. Professor former Federal Reserve Vice Chairman and Pimco Global Economic Advisor, Richard Clarida. I wonder in the absence of the official government data, what your take is on where we are in the economy with that softening labor market, yet the rest of the CapEx-driven growth hanging in there, and how the Fed’s current stance relates to it.

Host
Richard Clarida

Well, you’re right, we don’t get official data. There’s a lot of alternative high-frequency data and I think it will show eventually when we get the GDP numbers a pretty strong third quarter ending in September. There are two big forces in the labor market: reduced labor supply due to immigration policy changes, but probably reduced labor demand as well. The Fed has formed the judgment that it’s worried about downside risk to the labor market and thus that’s the rationale for the rate cut on risk management considerations. AI is already showing up in economic data with CapEx spending and investment in software which is a big driver in the economy right now.
Markets are okay for the moment with slightly less labor demand. What does the path look like into next year?

Host
Richard Clarida

I expect a rate cut at the early Fed meeting on October 29th, and one more cut after that. Into 2026, we will see a new Fed Chair nominee. We agree there is some room to get rates down to neutral, which we judge to be around 3%, roughly in line with market pricing. The speed and extent of cuts depend on inflation staying above 2%, which probably persists into next year, advising caution in moving rates all the way down too quickly.
The longer end of the Treasury curve has been relatively tame. If cutting rates and expecting more cuts were viewed as a mistake, rates would likely be higher, as last year. Is there more room to get toward 3% quicker or do we wait on inflation expectations?

Host
Richard Clarida

That depends on the next Chair. Standard analysis is to cut rates toward neutral but not to get all the way there unless either a recession occurs or inflation falls faster than expected. A new Chair may take a different approach, focusing on rebuilding the supply side of the economy. The standard view is to proceed cautiously as long as inflation is above target.
Chair Powell supports ceasing balance sheet shrinkage soon. What are the implications?

Host
Richard Clarida

The Fed has telegraphed slowing Q.T. pace and is expected to stop it probably in the first quarter of next year; possibly as soon as the end of this year based on reserve balance declines.

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