Fed is paralyzed by the market: Raoul Pal

The Federal Reserve's claims that the U.S. is not entering a recession are not reassuring, according to one widely followed market watcher who insists a downturn is already underway.

Investor Raoul Pal told CNBC's "Fast Money" last week, that the state of the market and the uneven economy has the Federal Reserve "paralyzed" — and no matter how it acts will result in catastrophe.

"If they raise rates, the dollar goes higher and it creates a problem for them. If they don't do anything then it's a sign that the economy is weak and that will lead asset prices to sell off," said Pal, publisher of The Global Macro Investor. "They are really boxed into a corner."

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Pal is known for making bold predictions. In November 2014 he called the rally in the U.S. dollar index and more recently, he said that European banks were going to zero. He know thinks the U.S. is entering a recession. In addition, Pal has argued that rather than proceed with another hike, the Fed will have to resort to negative interest rates.

"I think the chances of negative rates in the U.S. are relatively high. The Fed has been talking to people about it, banks have to start thinking about how to prepare for it," added the founder of Real Vision TV.

'Much worse from here'

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Amid mounting speculation, Fed Chair Janet Yellen said this month that she is unsure of the legality behind negative rates, but she does not expect the U.S. central bank to be in a situation where it would be necessary to adopt such a policy. St. Louis Fed President James Bullard echoed Yellen's comments last week, saying that the probability of a recession is not particularly high, and he reiterated that the Fed will remain data dependent.

Still, Pal insisted that the the central bank "will change the rules to make it happen." And he is, "very concerned that things are going to get much worse from here over time."

In the near term, however, the Goldman Sachs alum said the volatility is likely behind. "My view is that over the next few months is that things trade sideways," he said. "Then once the data starts weakening again into the summer then things start moving."

"I think the major direction for everything is bond yields lower, equities lower, oil lower, commodities lower and the dollar higher," he said. "But it's not going to happen for a while."