The frenzied unwinding of the Japanese yen carry trade — borrowing cheaply against the Japanese yen to buy high-growth stocks — may prompt the Federal Reserve to cut rates significantly when it meets in September.

"While we do not think at this time conditions are ripe for an emergency rate cut, the case for a supersized fifty basis point rate cut has been bolstered by the global unwinding of the carry trade," said Joe Brusuelas, chief economist with RMS US LLP.

Investors have been rushing for the exit on this investment strategy since Friday after the Bank of Japan raised interest rates from 0.1% to 0.25% on July 31.

Hedge funds and other investors held more than 180,000 contracts that were worth more than $14 billion at the start of July in a wager on a weaker yen, the Wall Street Journal reported. Those stakes had dropped to around $6 billion by last week.

The Fed might cut rates before the September meeting if the current market selloff continues, July's federal reports on consumer spending and prices give flat or negative readings and the August jobs report is weak, Brusuelas said.

"As of now, the Fed is in wait and observe mode and will not want to do or say anything that would facilitate an intensification of the already enhanced panic across global financial markets," he said on Monday.

"They will need further justification for an intermeeting rate cut and weak inflation prints, or bad jobs report would be just that."

The Dow Jones Industrial Average has fallen 2.4%, or 950 points, as of Monday's mid-day trading. The Global X Dow 30 Covered Call ETF (NYSE:DJIA), which tracks the Dow, has declined 1.71%.

• What Investors Should Know About Yen Carry-Trade Unwinding That Is Sending Global Markets Into A Tailspin