Joseph Stiglitz, a Nobel laureate, believes the Federal Reserve raised interest rates excessively and must now make significant reductions.

• Joseph Stiglitz, a Nobel Prize-winning economist, suggests that the Federal Reserve should reduce interest rates by half a point during its upcoming meeting.
• The release of U.S. jobs data is imminent, and investors are closely watching the August nonfarm payrolls count for indications of a potential rate cut this month.
• Stiglitz stated that he would support a larger rate cut at the central bank's September meeting, as he believes they have gone too far and it would aid in resolving the issues of inflation and employment.

Joseph Stiglitz, a Nobel Prize-winning economist, argues that the Federal Reserve should reduce interest rates by half at its upcoming meeting, claiming that the U.S. central bank has overdone it with monetary policy tightening and exacerbated the inflation issue.

The U.S. jobs data, which is scheduled to be released on Friday, will provide investors with insights into the size of an expected rate cut this month.

The most probable outcome from the Fed's upcoming meeting on September 17-18 is a 25-basis-point rate reduction, although there has been an increase in bets for a 50-basis-point reduction recently.

A basis point is 0.01 percentage point.

Stiglitz, a Nobel laureate known for his market analysis, joins the call for a supersized rate cut this month, like JPMorgan's chief U.S. economist.

Stiglitz criticized the Fed for going too far, too fast, according to CNBC's Steve Sedgwick at the annual Ambrosetti Forum held in Cernobbio, Italy.

Stiglitz stated that it was crucial for the Fed to normalize interest rates, arguing that it was a mistake for the U.S. central bank to maintain the benchmark borrowing rate near zero for an extended period since 2008.

Stiglitz stated that while they initially focused on the interest rates, he believed that going beyond that to where the interest rates have been put the economy at risk for little benefit, and may have even worsened inflation, ironically. He explained that if one looked more closely at the sources of inflation, a significant component was housing.

"Do you believe that raising interest rates to make it harder for real estate developers to build and homeowners to buy houses will solve the housing shortage problem, which is driving up inflation? No, this approach is counterproductive," he stated.

"Although their models do not account for inflation, I believe they should be looking at the economy's weaknesses and lowering interest rates."

The Fed's benchmark borrowing rate is currently set within a range of 5.25% to 5.5%.

Stiglitz stated that if he were a Fed policymaker, he would vote for a larger rate cut at the central bank's September meeting because he believes they went too far, which would aid in resolving the issue of inflation and job creation.

Stiglitz responded affirmatively when asked if a 50-basis-point rate cut should be considered, regardless of the August nonfarm payrolls figure.

A spokesperson at the Federal Reserve declined to comment.

Bets rising for a half-point reduction

The Fed's next policy-setting meeting is expected to result in a rate cut, with bets for a half-point reduction increasing after the release of the JOLTS report.

In July, the data revealed that the number of U.S. job openings reached their lowest point in 3½ years, indicating further evidence of a relaxed labor market.

Currently, traders are predicting a 59% chance of a 25-basis-point rate cut in September, with 41% expecting a 50-basis-point rate reduction, according to the CME Group's FedWatch Tool. A week ago, bets for a 50-basis-point rate cut stood at 34%.

Not everyone says a big interest rate cut is necessary this month.

George Lagarias, the chief economist at Forvis Mazars, stated that, although no one can predict the magnitude of the Fed's rate cut at its September meeting, he strongly supports a quarter-point reduction.

On Thursday, CNBC's "Squawk Box Europe" reported that Lagarias stated that he didn't understand the urgency for the 50 basis point cut.

The 50 basis point cut could send a wrong message to markets and the economy, indicating urgency, which could be a self-fulfilling prophecy.

"If they went there without a specific reason, it would be very dangerous. However, if there is an event that troubles markets, there is a reason for panic."