Nobel Prize-winning economist Joseph Stiglitz says the Federal Reserve should deliver a half-point interest rate cut at its forthcoming meeting, accusing the U.S. central bank of going “too far, too fast” with monetary policy tightening and making the inflation problem worse.
His comments come ahead of Friday’s pivotal release of U.S. jobs data, with investors closely monitoring the August nonfarm payrolls count for clues on the size of an expected rate cut this month. The jobs data is scheduled out at 8:30 a.m. ET.
Strategists have typically said that the most likely outcome from the Fed’s Sept. 17-18 meeting is a 25-basis-point rate cut, although bets for a 50-basis-point reduction have increased in recent days.
A basis point is 0.01 percentage point.
Stiglitz, who won the Nobel Prize in 2001 for his market analysis, joins the likes of JPMorgan’s chief U.S. economist in calling for a supersized rate cut this month.
“I’ve been criticizing the Fed for going too far, too fast,” Stiglitz told CNBC’s Steve Sedgwick on Friday at the annual Ambrosetti Forum held in Cernobbio, Italy.
Stiglitz said it was “really important” for the Fed to have normalized interest rates, adding that it was a mistake for the U.S. central bank to have held the benchmark borrowing rate near zero for such a long period since 2008.
“But then they went beyond that to where the interest rates have been, and I thought that put the economy at risk for very little benefit, probably actually worsening inflation, ironically, because if you looked more carefully at the sources of inflation, a big component was housing,” Stiglitz said.
“If you think about, how do we deal with the problem of a housing shortage, which is increasing the price of inflation — do you think raising interest rates making it more difficult for real estate developers to build more houses, homeowners to buy more houses, is going to solve the housing shortage? No, it’s going in exactly the wrong way,” he continued.
“So, I believe that they have contributed to the problem of inflation. Now, even though their models don’t work this way, and they’re not looking at things, I think, as deeply as they should, their models tell them [to] look at the weaknesses in the economy, and therefore we should be lowering interest rates.”
The Fed’s benchmark borrowing rate is currently targeted in a range between 5.25%-5.5%.
If he were serving as a Fed policymaker, Stiglitz said he would vote for a bigger rate cut at the central bank’s September meeting, “because I think they went too far, and it would actually help on the issue of inflation and on jobs.”
Asked whether this meant he believed a 50-basis-point rate cut should be on the table regardless of the August nonfarm payrolls figure, Stiglitz replied: “Yes.”
A spokesperson at the Federal Reserve was not immediately available to comment when contacted by CNBC on Friday.
Bets rising for a half-point reduction
Market participants are firmly pricing in a rate cut at the Fed’s next policy-setting meeting, with bets for a half-point reduction increasing shortly after Wednesday’s release of the report on Job Openings and Labor Turnover Survey, or JOLTS.
The data showed that U.S. job openings fell to their lowest level in in 3½ years in July, in what was seen as another sign of slack in the labor market.
Traders are currently pricing in a roughly 59% chance of a 25-basis-point rate cut in September, with 41% pricing in a 50-basis-point rate reduction, according to the CME Group’s FedWatch Tool. Bets for a 50-basis-point rate cut stood at 34% just over a week ago.
Not everyone says a big interest rate cut is necessary this month.
George Lagarias, chief economist at Forvis Mazars, said that, while no one can guarantee the scale of the Fed’s rate cut at its September meeting, he is “firmly” in the camp calling for a quarter-point reduction.
“I don’t see the urgency for the 50 [basis point] cut,” Lagarias told CNBC’s “Squawk Box Europe” on Thursday.
“The 50 [basis point] cut might send a wrong message to markets and the economy. It might send a message of urgency, and, you know, that could be a self-fulfilling prophecy,” he continued.
“So, it would be very dangerous if they went there without a specific reason. Unless you have an event, something that troubles markets, there is no reason for panic.”