The Fed has smashed the housing market and killed rampant speculation - and that means 'we're almost there' with inflation, former PIMCO chief economist says

• The Fed has smashed the housing market and killed rampant speculation, according to PIMCO's former chief economist.
• He pointed to the doubling of mortgage rates and trouble in crypto as signs the Fed has sufficiently tightened.

The Federal Reserve has smashed the housing market and killed the rampant speculation that was pervasive during the pandemic—and that means "we're almost there" with inflation, according to former PIMCO chief economist Paul McCulley.

In an interview with CNBC on Friday, the former PIMCO chief economist reiterated his view that inflation had already peaked and was on the downtrend, pointing to signs of damage in the economy inflicted by the Fed's aggressive rate hikes this year.

Mortgage rates have doubled and home buying activity is set to slump, meaning the housing market is "down for the count," McCulley said. Speculative bubbles in the market have also burst, he added, pointing to the recent turmoil in crypto markets set off by the collapse of FTX.

"The housing market is smashed, the enthusiasm for speculation in the marketplace [that] was rampant in 2021 has been removed," McCulley said. Those are signs the central bank have already tightened conditions significantly.

"I think we're almost there. I think we need to stop putting out the landing lights," he added, in regards to fears of rebounding inflation.

Inflation clocked in at 7.7% in October's inflation report, below economists' expectations of 8% inflation. McCulley thinks prices will continue to go down "materially" into 2023, which justifies the recent boost in the stock market.

"The pace of going down is less important than the fact it's coming down, and the Fed has already gotten to a restrictive stance on policy," he said. "And I think you've got today what I would describe to be a righteous rally."

Not all experts have agreed. Top economist Mohamed El-Erian previously stressed that while inflation was headed in the right direction, the US was already headed into a period of stagflation, which suggests the Fed can't ease up from its monetary tightening just yet.

The central bank has already hiked rates by nearly 400-basis-points this year, with expectations for another 50-basis-point hike in December and to keep hiking until the policy rate reaches 4.75%-5%. McCulley added he "can't personally rationalize" increasing expectations for the terminal rate, given the inversion in the yield curve - a notorious recession warning.