Wall Street is wrong about the Federal Reserve’s interest rate trajectory, according to former PIMCO chief economist Paul McCulley.
Barring a surprise jump in inflation, he thinks mounting economic pressures will convince the Fed to stop raising interest rates next month.
“It would be a break and then a pivot [later this year]”McCulley told CNBC”quick money” Tuesday.
McCulley delivered his latest forecast less than 24 hours before the government released the India consumer prices in MarchX. According to Dow Jones estimates, Wall Street is expecting a 5.1% year-on-year increase from 6% in February.
“They are [Fed officials] will look at the incoming data — acknowledging that what’s happening with the stress in the banking system is going to work in tandem with what they’ve already done with a tightening of almost 500 basis points,” he said.
McCulley’s call for a central bank pause is at odds with the CME Group’s recent estimate that shows a 73% chance of a quarter-point interest rate hike in May.
McCulley, who teaches a course in Fed observation at Georgetown University, sees a wide — albeit temporary — disconnect between the economic community and the market.
“I think as we move in the next week or two the street will go in that direction from an opportunity pricing perspective,” he said.
What will it take? McCulley noted some more of the same deteriorating economic data associated with troubling activity in the Treasury market.
“I can’t overstate the significance of the starting point being a severe inverted yield curve that’s going to give you a continual bleeding of deposits out of the banking system,” he said.
He added that a pivot could occur even without a recession and set up a healthier market.
“When the short end of the yield curve goes down and we shift the yield curve, then I think your garden variety, Main Street stocks, will attract supply,” McCulley said. “It’s not going to be a stock market that’s so driven by so few mega-growth stocks.”