Deep rate cuts are necessary because the Fed’s unprecedented hikes actually made inflation worse, Nobel-winning economist says

Joseph Stiglitz during of Laurea Honoris Causa Joseph Stiglitz on the Festival della Tecnologia on November 07, 2019 in Turin, Italy

The Federal Reserve’s aggressive campaign to curb inflation may have fueled the problem instead, Joseph Stiglitz told CNBC.

The Nobel-prize-winning economist called on the central bank to cut interest rates by 50 basis points at its approaching policy meeting. Given that rates were driven up “too far, too fast,” he said, “I believe that they have contributed to the problem of inflation.”

So far, investors are somewhat split on what the Fed will do on September 18th. Although a majority still anticipates a 25-basis-point cut, Friday’s jobs report moved odds in favor of a 50-basis-point move. The CME FedWatch Tool now is now assigning a 47% probability to a half-point cut, in line with Stiglitz’s urging.

In recent weeks, labor data has become a linchpin for determining whether the US is creeping toward a recession.

Friday’s weaker-than-expected reading did not completely ease concerns, putting pressure on the Fed to ease policy quickly. The central bank does so when it needs to boost the economy.

But Stiglitz, speaking ahead of the data’s release, told CNBC that he would pursue deeper rate cuts regardless of Friday’s report.

In his view, Fed officials were correct in raising the borrowing rate during the pandemic, citing that it was a mistake to keep interest rates at ultra-low levels after the 2008 crisis.

Since March 2022, the fed funds rate has climbed to a 5.25%-5.50% threshold.

“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 noted.

A key part of why the housing market keeps appreciating is a lack of homes, which will only be solved if home developers are given free rein to construct more properties, he said.

“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?” Stiglitz said. “No, it’s going in exactly the wrong way.”

In July, new home construction hit its lowest level since 2020, as developers have stepped back amid low demand. Builder confidence also tanked to a December bottom, though experts anticipate that falling interest rates should eventually boost sentiment.

Meanwhile, homebuyers appear sidelined as they wait for interest rate cuts to ease mortgage rates. The weekly 30-year fixed mortgage rate has now hit 6.35%, a drop from the 7% highs seen in May.