US Economy

Reasonable to expect rate hike mid-2015: Pimco’s McCulley

GDP 'silver lining'

The economy is getting closer to where the Federal Reserve needs it to be to start tightening, Pimco's chief economist, Paul McCulley, told CNBC.

The market was rattled Thursday after James Bullard, head of the Federal Reserve Bank of St. Louis, said interest rates could rise sooner than expected. Bullard believes the Fed should raise rates by the end of the first quarter of 2015.

"The market is getting ready for its first tightening dance and we haven't had one for eight years, so everyone's very nervous," McCulley said in an interview with "Closing Bell."

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Paul McCulley, chief economist of Pimco.
Patrick T. Fallon | Bloomberg | Getty Images

While McCulley said he is "genuinely uncertain" if the Fed will raise rates in the first, second or third quarter of 2015, he thinks it is reasonable to expect it midyear.

The big issue, McCulley said, is how long the central bank will tighten. While Bullard thinks the Fed will hike rates until it hits 4 percent, Pimco believes the "new neutral" is 2 percent.

"We have no disagreement with the notion that zero is not normal and the Fed will lift off zero," McCulley said. "Our issue is with the destination, not the liftoff. We say 2 [percent], he says 4."

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While gross domestic product and productivity plummeted in the first quarter, McCulley does not think that will be repeated in the second quarter.

"I think there were a number, a whole fistful of one-off factors in the first quarter."

GDP fell at a 2.9 percent annual rate in the first quarter, the economy's worst performance in five years. U.S. nonfarm productivity tumbled at a 3.2 percent annual rate, the sharpest drop in six years.

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"The fact that consumer income and job creation held up I think is the silver lining in what happened in the negative productivity in the first quarter," McCulley said.

—By CNBC's Michelle Fox. Reuters contributed to this report.