Nobel-prize winning economist Joseph Stiglitz says Fed should deliver big rate cut no matter what jobs data show

By Joseph Adinolfi

"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."Joseph Stiglitz

That's Nobel Prize-winning economist Joseph Stiglitz accusing the Federal Reserve of raising interest rates "too far, too fast" during an interview Friday with CNBC's Steve Sedgwick.

He added that he believes the Fed should cut interest rates by 50 basis points later this month regardless of what Friday's August jobs report shows.

During the interview, Stiglitz said it had been a mistake for the central bank to keep rates so low for so long following the 2008 financial crisis. Now, it is crucially important for the Fed to shift borrowing costs back toward a more normal level.

Ironically, the Fed's decision to hike interest rates may have actually done more to hinder the fight against inflation than to help it, Stiglitz said. One reason is that higher rates make housing - a major input into inflation gauges like the CPI Index - more expensive.

"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," Stiglitz said.

Stiglitz said the Fed should strongly consider a 50 basis point interest-rate cut later this month, regardless of what the August jobs numbers show when they are released Friday morning.

The prize-winning economist is hardly the only member of his profession calling for a 50 basis-point cut. Renaissance Macro's Neil Dutta has criticized the Fed for not cutting rates in July and has said they could partially make up for this with a 50 basis-point cut this month.

Michael Feroli, the top economist at JPMorgan Chase & Co., has also advocated for a 50 basis point cut.

As of early Friday, futures traders expected about a 40% chance of a larger rate cut later this month, according to data from the CME Group.

Stiglitz won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel back in 2001.

A slide in U.S. stocks to kick off September has reignited concerns that the Fed may have waited too long to cut interest rates.

U.S. stock index futures were headed lower on Friday as investors geared up for another tumultuous session during what has been a hectic week for markets.

Many stock-market strategists have blamed signs of a quickly cooling labor market and economy for sparking the selloff, reviving concerns that the Fed may have waited too long to cut rates.

Friday's jobs report is expected to show 161,000 jobs were created last month while the unemployment rate ticked lower.

The S&P 500 SPX has fallen 2.3% through Thursday to 5,503, while the Nasdaq Composite COMP has fallen 4.2% to 17,127. The Dow Jones Industrial Average DJIA has fallen 1% to 40,755.

-Joseph Adinolfi

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09-06-24 0809ET

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