Federal Reserve Interest Rates Outlook

The Federal Reserve’s decision on cutting interest rates will largely depend on the upcoming August jobs report, according to analysts from Evercore ISI.

Recent inflation data has shown signs of cooling. However, the Fed is now prioritizing labor market trends to guide its monetary policy decisions.

Evercore ISI emphasized that the Federal Reserve has shifted to a “labor data-first Fed, not an inflation data-first Fed.” This means that the health of the job market will serve as the key indicator for how quickly and significantly the Fed will reduce rates.

According to Evercore, “we are anyway past the phase at which a few basis points on monthly inflation is going to drive the rate path.” Incoming labor data will dictate the aggressiveness of rate cuts.

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

They noted, “This print is not so benign as to suggest the Fed has a totally free hand to focus on the labor market.” If however, labor data demonstrates significant weakness, more drastic actions might be taken.

Should the data indicate a “cracking” labor market, the Fed could enact cuts totaling 200 to 250 basis points by year-end. Conversely, if job market data exceeds expectations, only two cuts may happen this year.

Furthermore, analysts mentioned that while the July CPI print was “not perfect,” it was adequate to alleviate inflation concerns, allowing the Fed to focus on employment risks. Therefore, the upcoming August jobs report will be critical in determining the Fed’s future actions.