Nobel laureate criticizes the Federal Reserve: Interest rates should be cut by 50 basis points in September!

Nobel laureate in economics Joseph Stiglitz said that the Federal Reserve should cut interest rates by 50 basis points at the upcoming meeting, accusing the Fed of "going too far, too fast" in tightening monetary policy, exacerbating inflation issues.

His comments came before the release of non-farm payroll data on Friday, with investors closely watching the changes in August non-farm employment numbers for clues to the Fed's rate cut this month.

Strategists typically suggest that the most likely outcome of the Fed's meeting on September 17-18 is a 25 basis point rate cut, although market bets on a 50 basis point rate cut by the central bank in September have increased in recent days.

Stiglitz, who won the Nobel Prize in 2001 for his market analysis, joined the ranks of Morgan Stanley's chief US economist and called for a significant rate cut this month.

Speaking at a forum in Chernobio, Italy on Friday, Stiglitz said, "I have always criticized the Fed for going too far, too fast."

Stiglitz stated that it is "very important" for the Fed to normalize interest rates, adding that keeping the benchmark lending rate near zero since 2008 was a mistake. Stiglitz said:

"But then they compounded the error by keeping rates at their current level, which I think poses risks to the economy, and the returns are minimal, which may actually exacerbate inflation. Ironically, if you look closely at the sources of inflation, housing is one of the important factors."

He continued, "Housing shortages are driving up inflation. Do you think raising rates, making it harder for real estate developers to build more houses, and making it harder for homeowners to buy more houses, can solve the housing shortage problem? No, this is completely the wrong direction, so I believe the Fed has exacerbated the inflation problem. Now, even though their models don't operate in this way, and they haven't looked at the problem as deeply as they should, their models tell them to focus on weaknesses in the economy, so we should lower rates."

The Fed's target range for the benchmark lending rate is currently 5.25%-5.5%. Stiglitz said that if he were a Fed policymaker, he would vote for a larger rate cut at the September meeting, "because I think they have gone too far, which will actually help address inflation and employment issues."

When asked if this means he believes a 50 basis point rate cut should be considered regardless of how the August non-farm employment numbers turn out, Stiglitz replied, "Yes."

Market participants are firmly expecting the Fed to cut rates at the next policy meeting, with bets on a 50 basis point rate cut in September increasing shortly after the release of the Job Openings and Labor Turnover Survey (JOLTS) report on Wednesday.

Data shows that job vacancies in the US fell to their lowest level in three and a half years in July, seen as another sign of weakness in the labor market.

According to the "Fed Watch" tool from the Chicago Mercantile Exchange Group, traders currently estimate a 59% chance of a 25 basis point rate cut in September, and a 41% chance of a 50 basis point rate cut More than a week ago, the bet on a 50 basis point rate cut was 34%.

However, not everyone believes it is necessary to cut rates significantly this month.

George Lagarias, Chief Economist at Forvis Mazars, said that while no one can guarantee the size of the rate cut at the Fed's September meeting, he "firmly" supports a 25 basis point cut.

Lagarias said on Thursday, "I don't think the Fed needs to urgently cut rates by 50 basis points. A 50 basis point cut could send the wrong signal to the market and the economy. This could create a sense of urgency, which could be a self-fulfilling prophecy, so it would be very dangerous for the Fed to take such action without specific reasons. There is no reason to panic unless something unsettling happens in the market."