According to former Pimco chief economist Paul McCulley, Wall Street is mistaken about the Federal Reserve’s interest rate path.
Unless inflation surprises to the upside, he believes accumulating economic pressures will persuade the Fed to halt rate hikes next month.
McCulley provided his most recent forecast less than twenty-four hours before the publication of the March consumer price index by the government. According to Dow Jones estimates, Wall Street anticipates a 5.1% year-over-year increase as opposed to a 6.0% increase in February.
“Fast Money” on Tuesday that a pause would be followed by a pivot later this year.
“They’re going to look at the data that’s coming in, recognizing that what’s going on with the duress in the financial system will work in tandem with what they’ve already done with almost 500 basis points of tightening,” he stated.
McCulley’s demand for a central bank halt contradicts a recent CME Group forecast that indicates a 73% chance of a quarter-point interest rate increase in May.
McCulley, who teaches a Georgetown University course on Fed monitoring, observes a wide, albeit transient, divergence between the economic community and the market.
“I believe that over the next week or two, Wall Street will shift in that direction in terms of pricing the probabilities,” he said.
What is required?
McCulley noted more of the same deteriorating economic data alongside unsettling Treasury market activity.
“I cannot overstate the significance of a severely inverted yield curve as the starting point, which will result in a steady outflow of deposits from the banking system,” he said.
He added that a pivot could occur even in the absence of a recession, creating a healthier market.
McCulley stated, “When the short end of the yield curve falls and we reslope the yield curve, I believe common, Main Street equities will attract bids.” This stock market will not be dominated by a handful of mega-growth stocks.