Fed Likely To Pause In May, Says Former Pimco Economist Paul McCulley — But Won't Make 'Table-Pounding Declaration'

Former Pimco chief economist Paul McCulley believes the Federal Reserve is likely to hold its rate hike cycle during its upcoming policy meet in May and said he disagrees with where the Fed funds futures are priced.

What Happened: "I don’t think that the street at large, my old economic community, is convinced. That’s 70% odds, that’s where the marketplace is. I think we’re having a very lively debate in the community, and I think we are having a very lively debate at the Fed," he told CNBC.

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McCulley also pointed out that the rate hike in March will prove to be the last one but said there won't be a table-pounding declaration about it at the next Fed meet.

"They will be declaring essentially, I think, that they’re going to pause and they’re going to look at the data coming in, recognizing that what’s going on with distress in the banking system is going to work in tandem with what they already have done with 500 basis points worth of tightening almost," he said.

Pivot: McCulley pointed out that continued disinflation is needed for the Fed to pivot and also highlighted the need for some more softening in the labor market.

Major Wall Street indices closed mixed on Tuesday as investors and traders remained cautious ahead of the release of the consumer price inflation data on Wednesday.

The SPDR S&P 500 ETF Trust (NYSE:SPY) closed 0.03% higher while the Invesco QQQ Trust Series 1 (NASDAQ:QQQ) lost 0.64%.

"Remember, we are starting from a standpoint of an inverted curve — a deeply inverted curve — and that in itself has profound negative pressure on the banking system. So, essentially, all of the parts are coming together in a pause and then a pivot. So, you don’t need to have a recession or another run," McCulley said.

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