Nobel laureate Joseph Stiglitz wants the Fed to cut interest rates dramatically

Nobel Prize-winning economist Joseph Stiglitz said the Federal Reserve should cut interest rates by half a percentage point at its next meeting, accusing the US central bank of tightening monetary policy “too much, too quickly,” exacerbating the inflation problem.

His comments came ahead of a key U.S. jobs report on Friday, with investors closely watching August’s nonfarm payroll figures for clues about the size of a possible rate cut this month. The data is due to be released at 8:30 a.m. ET.

Strategists generally say a 25 basis point cut is most likely when the Fed meets on Sept. 17-18, but in recent days there has been growing expectation of a 50 basis point cut.

One basis point is 0.01 percentage point.

Stiglitz, who won the Nobel Prize in 2001 for his market analysis, has joined JPMorgan’s chief U.S. economist in calling for a big rate cut this month.

“I’ve been critical of the Fed for moving too quickly and too far,” Stiglitz told CNBC’s Steve Sedgwick on Friday at the annual Ambrosetti Forum in Cernobbio, Italy.

Stiglitz said it was very important that the Fed normalized interest rates, adding that the US central bank had made a mistake by keeping its benchmark interest rate near zero for so long since 2008.

“But then they raised interest rates to where they are now, putting the economy at risk for very little benefit and, ironically, exacerbating inflation, I think, because if you look more carefully at the causes of inflation, a big part of it was housing,” Stiglitz said.

“When you think about how to address the housing shortage that’s causing inflationary price increases, do you think that’s going to be solved by raising interest rates to make it harder for developers to build homes and harder for homeowners to buy homes? No, that’s just the wrong way around,” he continued.

“So I believe they contributed to the inflation problem. Their models don’t work this way, and they don’t look at things deeply, but their models tell them [to] They should focus on the weaknesses of the economy and therefore lower interest rates.”

The Federal Reserve’s benchmark borrowing rate is currently targeted at a range of 5.25% to 5.5%.

Stiglitz said that if he were a Fed policymaker, he would vote for a bigger rate cut at the September Fed meeting. “I think a rate cut is too much and would actually help the inflation and employment issues,” he said.

Asked whether that meant he thought a 50 basis point rate cut should be considered regardless of August’s nonfarm payrolls figure, Stiglitz replied: “That’s right.”

A Federal Reserve spokesman declined to comment.

Market participants are firmly pricing in a rate cut at the Fed’s next policy meeting, with expectations of a half-point cut increasing immediately following the release of the Job Openings and Labor Turnover Survey (JOLTS) report on Wednesday.

Data showed U.S. job openings fell to the lowest level in three and a half years in July, seen as a new sign of slack in the labor market.

According to CME Group’s FedWatch tool, traders now see about a 59% chance of a 25-basis-point cut in September, and a 41% chance of a 50-basis-point cut, up from a 34% chance a little over a week ago.

Not everyone is saying a big interest rate cut is needed this month.

George Lagarias, chief economist at Forbis Mazars, said while no one can guarantee the size of a rate cut at the September Fed meeting, he is “firmly in the camp” for a quarter-point cut.

“I don’t feel the urgency of 50. [basis point] “There will be cuts,” Lagarias said Thursday on CNBC’s “Squawk Box Europe.”

“50 [basis point] “Cutting rates could send the wrong message to markets and the economy. It could send a message of urgency, which could become a self-fulfilling prophecy,” he continued.

“So if they go there for no particular reason, it’s very dangerous. There’s no reason to panic unless there’s an event that’s disrupting the market.”