Wall Street is wrong: Former Pimco chief economist Paul McCulley predicts rate hikes will end next month

Wall Street is wrong: Former Pimco chief economist Paul McCulley predicts rate hikes will end next month

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 hiking rates next month.

“It 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 releases the March consumer price index. According to Dow Jones estimates, Wall Street expects a 5.1% year-over-year increase versus 6% in February.

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

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

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McCulley, who’s teaching a Fed watching class at Georgetown University, sees a wide — albeit temporary — disconnect between the economic community and the marketplace.

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

What will it take? McCulley noted just more of the same deteriorating economic data paired with troubling activity in the Treasury market.

“I cannot overestimate the importance of the starting point being a severe inverted yield curve which is going to give you a continual bleed of deposits out of the banking system,” he said.

He added a pivot could come even without a recession, and set 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 such a few mega growth stocks.”

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