Fed higher for longer stance may force intermeeting cuts: Evercore ISI

Investing.com -- The longer the Fed clings onto its higher for longer policy stance, the greater the risk that it may fall behind the curve and be forced to cut in between Fed meetings.

While the Fed doesn't want to cut intermeeting, Evercore says, the longer the central bank "waits to signal dovish the greater the risk it ends up there after a further down-leg in markets."

The pressure on the Fed to deliver large cuts is mounting after the July payrolls report and manufacturing data last week sprung a downside surprise, prompting fears about a faster slowdown in the recession.  

Data on Monday, however, suggest that the U.S. may not on a short and narrow road to a recession. "Services PMI and Monday’s intraday reversal suggesting the July employment report overstated weakness," Evercore ISI added. 

Others are wary of flagging economic doom on the horizon, with  Morgan Stanley  (NYSE:MS) saying "while there is clear evidence of cooling, it is still too noisy to justify a 50bp cut in September."

The signal from the Fed to turn dovish could come as soon as later this month, when the chairman Jerome Powell and other central bankers gather at the annual central bank symposium at Jackson Hall, Wyoming, slated for Aug. 22-24.

In the run-up to the symposium, should Fed leadership signal that they are "attentive to the data and markets, will adjust policy in coming meetings as needed to ensure it is ahead of the curve and will be aggressive relative to the data under risk management," will point to incoming deeper, aggressive rate cuts, Evercore ISI said.

"Jackson Hole could then guide faster cuts (25s every meeting for now) or faster and bigger cuts (50s) based on the next set of labor data," it added.

Fed members, however, aren't in rush to endorse steeper cuts just yet. Fed Chicago president Austin Goolsbee said on Monday that the recent jobs report didn't signal a looming recession and added that the Fed wouldn't react to one number. 

"We're going to take all the measures, we shouldn't react to one number," he said. The policymakers can wait for more data before the FOMC's September meeting, Goolsbee added.

At Jackson Hole, investor focus will likely be on whether the Fed is signalling a reactive cut to stave off a recession or proactive cut to "secure the soft landing," Evercore said.