August jobs data will determine size of Fed rate cuts: Evercore

The Federal Reserve's decision on how aggressively to cut interest rates in the coming months will largely depend on the upcoming August jobs report, according to Evercore ISI analysts.

While recent inflation data has shown some cooling, the Fed is now more focused on labor market trends to guide its monetary policy decisions.

Evercore ISI emphasized that the Federal Reserve has transitioned to being a "labor data-first Fed, not an inflation data-first Fed." This means that the strength or weakness of the job market will be the key determinant in how quickly and by how much the Fed will reduce rates.

"We are anyway past the phase at which a few basis points on monthly inflation is going to drive the rate path," states Evercore. "This is now a labor data-first Fed, not an inflation data-first Fed, and the incoming labor data will determine how aggressively the Fed pulls forward rate cuts."

If August's labor data shows improvement over July but continues on a softening trend, Evercore ISI expects the Fed to cut rates by 25 basis points at each remaining meeting this year, with further reductions potentially extending into early 2025.

"This print is not so benign as to suggest the Fed has a totally free hand to focus on the labor market," they write.

However, if the labor market data shows significant weakening, the Fed might take more drastic measures, says the firm.

According to Evercore ISI, should the data suggest a "cracking" labor market, the Fed could enact cuts totaling 200 to 250 basis points by the end of the year. Conversely, if the job market data is stronger than expected, the Fed may only implement two cuts this year.

The analysts also noted that while the July CPI print was "not perfect," it was sufficient to keep inflation concerns at bay, allowing the Fed to focus more on employment risks. The August jobs report, therefore, is poised to play a crucial role in shaping the Fed's next moves.