With her speech entitled “From Adding Accommodation to Scaling It Back” on 3 March 2017, U.S. Federal Reserve Chair Janet Yellen not only cemented market expectations for the Fed’s third rate hike in this cycle, subsequently implemented in the Ides of March. She also unintentionally provided what turned out to be the leitmotif of PIMCO’s March 2017 Cyclical Forum – scaling it back. We found ourselves applying the concept to not just the monetary policy outlook but to a range of developments across the global economy.

Aided by the participation of our Global Advisory Board consisting of its chairman Ben Bernanke, Gordon Brown, Ng Kok Song, Anne-Marie Slaughter and Jean-Claude Trichet, and informed by our macro team’s scenario analysis and our regional portfolio committees’ presentations, PIMCO’s investment professionals debated whether our 2017 cyclical (six- to 12-month) narrative of radical uncertainty and fatter tails from last December (see “Into the Unknown”) was still intact. Our conclusion: Yes, but.

Given the continuing lack of detail on the Trump administration’s fiscal and trade policies, the lingering uncertainty about the upcoming elections in France, Germany and potentially Italy, and the risks associated with China’s debt bubble and capital outflow pressures, we reconfirmed our “Stable But Not Secure” secular (three- to five-year) framework and generally also our “fatter tails” cyclical outlook. (“Fatter tails” refers to the distribution curve of potential outcomes in which we see a generally lower-than-usual probability of the central or baseline scenario coming to pass and correspondingly higher probabilities of the tail-risk scenarios, both to the downside, or left tail, and to the upside, or right tail.) However, given what we learned in the three months since our December forum, our cyclical story has become slightly more nuanced in several ways. Here’s how and why:

First, we scaled back the expected size of fiscal stimulus in the U.S. and now anticipate a fiscal package to be finalized in Congress only in early 2018 – thus its impact would occur beyond our cyclical horizon. Repealing and replacing Obamacare will keep Congress busy for a while, and comprehensive tax reform will take time and is hard to do given the rising opposition to the border adjustment tax from the adversely affected importing industries and in the Senate. Thus, any fiscal boost is likely to be smaller and come later. Viewed in isolation, this somewhat reduces the probability of a right-tail (positive) outcome for economic growth, at least over our cyclical horizon, even though expectations of an eventual fiscal package should continue to support consumer and business sentiment.

Second, it also seems appropriate to scale back the left-tail risk of a full-blown trade war sparked by aggressive U.S. trade policy changes. To be sure, the rhetoric coming out of the administration on trade continues to be antagonistic. However, the reported debate within the White House between moderate “globalists” and more aggressive “nationalists” suggests that the rhetoric shouldn’t be taken at face value. It would have been easy for the Trump administration to impose trade sanctions early on via executive orders. The fact that this hasn’t happened even though the trade hawks were already operating in the White House early on in this administration while the more moderate voices were still awaiting congressional confirmation suggests that President