Currently, markets expect the Fed will begin tightening monetary policy at its meeting in September. Gauges like closely watched fed fund futures contracts are pricing in a 45 percent chance of a September rate hike, while other analysts see the odds as higher.
Yet institutions like the International Monetary Fund have warned that a rate hike might imperil a fragile global recovery. In June, the IMF's deputy director warned about potential risks of a Fed tightening.
Read More Fed rate hike risks disorderly markets: IMF
By Paul's reasoning, the Fed is too scared to raise interest rates in the middle of an already weak recovery and risk sending the U.S. economy back into recession, or worse. "They're terrified of 1937," said Paul, who has long called for a "day of reckoning" that will lead to the collapse of both the fixed income and equity markets.
The Fed chief "does not want to be responsible for the depression that I think we've been in the midst of all along," Paul added.
In a research note, Brown Brothers Harriman said mounting global risks "may very well boost the risk of a Fed hike in September, on ideas that Fed officials may feel the need to show that it keeps its own counsel. Fed policy is not set by the IMF, Beijing or institutional traders that dominate the U.S. equity market."
If a rate hike does happen, it would be the first rate increase in almost a decade.
"Everything is vulnerable, so we're living in very dangerous times," Paul added.