Although recent inflation data shows signs of easing, the Federal Reserve's current policy focus has shifted to trends in the labor market, using this as the primary basis for its monetary policy decisions.
Analysts at Evercore ISI point out that the Federal Reserve has shifted from an inflation data-driven decision-making approach to one that pays more attention to the performance of the labor market. This means that the state of the job market will be a key factor in determining the extent and pace of future rate cuts by the Fed.
They stated: "We are no longer in a phase where we rely solely on monthly inflation data. Now, the Fed's decisions are more dependent on labor market data. The upcoming employment data will determine the Fed's enthusiasm for future rate cuts."
If labor market data for August shows some improvement but remains overall weak, Evercore ISI expects the Fed to cut rates by 25 basis points at each remaining meeting this year, and potentially further reductions in early 2025.
Analysts emphasize that this report does not imply that the Fed can focus on the labor market without any constraints, but if the data shows significant signs of weakness, the Fed may take more aggressive rate-cutting measures.
Specifically, Evercore ISI believes that if the labor market exhibits "serious weakness," the Fed might cumulatively cut rates by 200 to 250 basis points by the end of this year. However, if job market data is stronger than expected, the number of rate cuts may be reduced to two.
Additionally, although the July Consumer Price Index (CPI) data was not ideal, it was sufficient to stabilize inflation concerns, allowing the Fed to focus more on employment risks. Therefore, the employment report for August will play a crucial role in determining the Fed's next steps.
