The Federal Reserve's decision on how aggressively to cut interest rates in the coming months will depend on the upcoming August jobs report, according to analysts from Evercore ISI.
Although the latest inflation data showed some slowdown, the Fed is now focusing more on job market trends to guide its monetary policy decisions.
Evercore ISI emphasizes that the Federal Reserve has shifted from prioritizing inflation data to employment data.” This means that the strength or weakness of the job market will be a key determinant in how quickly and by how much the Fed will cut interest rates.
If August's jobs data shows an improvement over July but continues to show a softening trend, Evercore ISI expects the Fed to cut interest rates by 25 basis points at each of its remaining meetings this year, with further cuts likely extending into early 2025.
"These data are not enough to suggest that the Fed has complete freedom to focus on the job market," Evercore ISI reported.
However, if job market data shows significant weakness, the Fed may take more drastic measures, the firm said.
According to Evercore ISI, if the data shows a "fragile" job market, the Fed may implement a reduction amounting to 200 to 250 basis points by the end of the year. On the other hand, if job market data is stronger than expected, the Fed may only implement two reductions this year.
Analysts also noted that while July's CPI reading was "not perfect," it was enough to keep inflation in balance, allowing the Fed to focus more on employment risks. Therefore, the August employment report will play an important role in shaping the Fed's next move.
