Wall Street is wrong about the Fed’s interest rate path, according to former Pimco chief economist Paul McCauley.
Barring a sudden jump in inflation, he believes that growing economic pressures will convince the Fed to stop raising interest rates next month.
“It will be a pause and then pivot [later this year]McCauley told CNBC’s “Fast Money” on Tuesday.
McCauley provided his latest forecast less than 24 hours before the government released its Consumer Price Index for March. According to Dow Jones estimates, Wall Street expects an increase of 5.1% year over year versus 6% in February.
“they [Fed officials] We’ll look at the data coming in — recognizing that what’s happening with the stress in the banking system will work in tandem with what they’ve already done with roughly 500 basis points worth of tightening.”
McCauley’s call for the central bank’s pause contradicts CME Group’s latest estimate which shows there is a 73% chance of a quarter-point rate hike in May.
McCauley, who teaches a Fed Watch class at Georgetown University, sees a broad – if temporary – disconnect between economic society and the market.
“I think as we get out in the next week or two, the Street will move in that direction from a probability pricing standpoint,” he said.
What will it take? McCauley pointed to more of the same deteriorating economic data paired with worrying activity in the treasury market.
“I can’t overestimate the importance of the starting point being a steep inverted yield curve that will give you a constant bleeding of deposits out of the banking system,” he said.
He added that the pivot could come even without a recession, and establish a healthier market.
“When the short end of the yield curve goes down and we re-slope the yield curve, I think your garden variety, Main Street stock will catch a bid,” McCauley said. “This is not going to be a stock market led by a few big growth stocks.”
“Beer fan. Travel specialist. Amateur alcohol scholar. Bacon trailblazer. Music fanatic.”