This is now a labor-data first Fed, not an inflation-data first Fed: Evercore

According to Evercore ISI analysts, the Federal Reserve's focus has shifted from inflation data to labor data, fundamentally altering its approach to monetary policy.

The investment firm said in a note Monday that despite market turmoil and expectations around inflation, the Fed now prioritizes the labor market, with the upcoming U.S. CPI inflation data playing a secondary role in decision-making.

Evercore ISI explains that while the Fed is still mindful of inflation, particularly the July CPI, it is "less data-point dependent, more forward-looking."

They emphasize that even if inflation prints hotter than expected, the Fed is likely to remain focused on preventing labor market softening.

The note states, "The labor data is now more important for the Fed and for markets than the inflation data."

This shift is said to reflect the Fed's broader strategy to mitigate downside risks to employment rather than overreacting to short-term inflation fluctuations.

The analysts note that this "two-sided risk management" approach has been adopted as the Fed acknowledges the progress made on inflation and the reduced likelihood of the labor market driving inflation higher.

The upcoming inflation data will influence the Fed's freedom to act, but Evercore ISI believes that "a soft print with core CPI rounding to 0.2 on good composition would be unambiguously risk-on," giving the Fed more room to cut rates preemptively.

However, even if the inflation print is less favorable, the analysts expect the Fed to lean towards managing employment risks, with a high likelihood of rate cuts in September.

Ultimately, Evercore ISI concludes, "This is now a labor-data first Fed, not an inflation-data first Fed," with market reactions and Fed policy increasingly hinging on labor market trends rather than inflation figures.