Fed rate hikes to end next month: Former PIMCO economist McCulley

Wall Street is wrong about the Federal Reserve’s interest rate path, according to former PIMCO chief economist Paul McCulley.

Barring a surprise jump in inflation, he believes mounting economic pressures will convince the Fed to stop raising interest rates next month.

“There would be a pause and then a pivot [later this year],” McCulley told CNBC’s “Fast Money” on Tuesday.

McCulley delivered his latest forecast less than 24 hours before the government publishes the consumer price index for March. According to Dow Jones estimates, Wall Street expects an increase of 5.1% year-on-year against 6% in February.

“They are [Fed officials] is going to look at the data coming in — and recognize that what’s happening with the stress in the banking system is going to work alongside what they’ve already done with almost 500 basis points worth of tightening,” he said.

McCulley’s central bank pause is at odds with the recent CME Group estimate showing a 73% chance of a quarter-point rate hike in May.

McCulley, who teaches a Fed monitoring class at Georgetown University, sees a broad — if temporary — disconnect between the financial community and the market.

“I think as we move out in the next week or two, the Street will move in that direction from the standpoint of pricing the odds,” he said.

What is needed? McCulley noted only more of the same deteriorating economic data along with troubling financial market activity.

“I cannot overstate the importance of the starting point being a severe inverted yield curve that will give you a continuous bleeding of deposits out of the banking system,” he said.

He added a pivot could come even without a recession, setting up a healthier market.

“When the short end of the yield curve comes down and we re-slope the yield curve, then I think your garden variety, Main Street stocks will catch a bid,” McCulley said. “This will not be a stock market that is so led by so few mega-growth stocks.”


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