2 economists explain why the Fed should cut rates more than expected next month

• Most investors on Wall Street are pricing in a 25-basis-point interest rate cut in September.
• But economist Claudia Sahm sees a strong case for a 50-basis-point cut, given labor weakness.
• Jeremy Siegel also noted that policy exceeds the neutral rate, risking a recession.

All of Wall Street seems to be anticipating imminent interest rate cuts, but economists remain split on how far the reduction should go.

Most agree that recent labor and inflation data have made a quarter-point cut appropriate for September. The Federal Reserve slashes rates to revive the economy and will do so when it sees signs of a cooldown.

July's weaker-than-expected jobs report was one such signal, as unemployment's sudden uptick to 4.3% triggered fears that interest rates were too high. On Wednesday, downward labor revisions further convinced investors that it's time for policy to ease.

CME FedWatch Tool data shows the market pricing in a 75.5% chance that the Fed will reduce rates by 25 basis points in September.

But there's a strong case for a 50 basis point cut instead, former Fed economist Claudia Sahm told Bloomberg TV on Tuesday.

Doing so would "recalibrate" the central bank and help it shore up unemployment, which has become too weak, she noted.

"Their mandate is maximum employment. It's not 'no recession,' right?" Sahm said. "They should be looking for no less weakening in the labor market than is absolutely necessary to get inflation down, and I think the balance has now shifted."

A deeper reduction would also put the Fed back on track for those who felt that policy should have started easing in July, Sahm added.

Wharton professor Jeremy Siegel agreed.

"I think they're taking on risk they don't have to take," he told CNBC on Thursday. "The faster they get down, the lower the probability that they're going to have a recession and a significant slowdown in the economy."

Siegel pointed out that the current fed fund rate of 5.25% to 5.50% is too restrictive compared to the estimated neutral rate.

This is the level at which borrowing costs no longer impact inflation and labor. Considering that inflation is nearing the Fed's target rate, Siegel said monetary policy is becoming needlessly tight.

He estimates that the neutral rate at 2.8%, well below the current fed funds rates. That's based on the 10-year bond yield, which historically trades 100 basis points above the neutral rate.

Others on Wall Street see things differently. On Wednesday, Apollo chief economist Torsten Slok cited that the Fed has plenty of time to adjust policy, given alternative evidence that the economy is still strong.

For instance, retailer data indicates that consumers are still on a spending streak, while weekly jobless claims have been encouraging.

For some guidance on the Fed's plans, investors will tune into Chairman Jerome Powell's speech at the Jackson Hole Symposium on Friday.