Investing -- The Federal Reserve is likely to cut rates twice this year starting in September, but if inflation data doesn't show enough of a slowdown by September, then the Fed is unlikely to deliver any cuts at all this year as there will be little chance of the data improving enough by year end.     

"We think the base case is two cuts starting by September, and the next most likely outcome is none," ISI Evercore said.

The forecast comes as the market continues to debate whether one, two or no rates cuts are needed this year. Current market consensus continues to side with about two cuts for this year.

The two-rate cut camp believe in Fed chairman Jerome Powell's dovish thesis that monetary policy is restrictive, the recent upside surprises in inflation were backward looking, representing a blip along a bumpy road toward the 2% inflation target, and inflation will downshift at some point in the coming months, paving the way for September rate cut, Evercore ISI said. 

"We think inflation downshifts in time for the Fed to cut in September and December," it added. But if the data hasn't improved enough by September for the Fed to cut, then it likely won't by December, all but ending the odds of any rate cut this year. 

"The economic interpretation and base effects mean it would take a very sharp cooling in Q4 to keep 12-month inflation low enough for one cut in December. Otherwise: no cut before March 25," it added.

If the inflation data doesn't show enough progress, or specially year-on-year core PCE inflation treads water around 3%, absent of cracks in the labor market, then the Fed isn't likely cut at all until March next year, as the central bank's higher for longer policy would have had time to make a bigger impact on the economy and the base effects "start to work in the Fed’s favor again, with the hot January and February 2024 inflation prints dropping out of the year-on-year comparison," Evercore ISI added.

For the Fed to cut sooner than September, just about everything needs to go right, or badly quickly starting with the inflation data due out this week.

"April PPI and CPI would need to print at a level consistent with month-on-month core PCE inflation no higher than 0.20% and likely below 0.20, with good composition that lends additional confidence in order to put July seriously in play," it said, followed by very good May reports, too. "We think a pair of 0.17s for instance would ignite the case for July, while even a 0.23 would leave July deeply out of the money."