• Incoming manufacturing data have been cooling, especially in terms of new orders and hiring expectations.

• Global economic activity continues to disappoint.

• While concerns over trade added to corporate uncertainty, the waning effects of corporate tax cuts also weighed on business decision-making.

But despite the negatives, the U.S. economy is trending at solid levels with GDP at 2.0 percent in the second quarter, following a stronger first quarter with GDP at 3.1 percent.

The Fed’s Mindset

Chairman Powell reiterated the Fed’s well telegraphed message for a rate cut at a Council on Foreign Relations event at the end of June, given that “crosscurrents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy.”

Mary Daly, president of the Federal Reserve Bank of San Francisco, said in a recent interview that her “bottom line” is sustaining the expansion so inflation can move back up to the Fed’s 2.0 percent inflation target. Powell has characterized low inflation as “one of the major challenges of our time.” At the June FOMC meeting, the Fed’s 2019 projection for the personal consumption expenditure (PCE), the Fed’s preferred index for inflation, was reduced to 1.5 percent from 1.8 percent, while the core PCE was lowered to 1.8 percent from 2.0 percent. Accordingly, the Fed sees inflation below its 2.0 percent target for the rest of the year, which continues to suggest that, if concerns over slowing growth persist, an “insurance” rate cut may be appropriate.

Although stating that low inflation is “transitory,” the Fed may be inclined to lower rates further in an attempt to spur economic activity. In addition, concerns surround trade-related uncertainty, which, despite easing, still hovers over markets.

The upcoming earnings season also plays a role in how the Fed assesses the economy and its monetary policy. According to FactSet, earnings are set to decline and will be weaker than current estimates by Wall Street analysts. Not surprisingly, the technology sector has the largest proportion of negative preannouncements, as it is most closely associated with global growth, particularly with regard to China. Trade tensions have exacerbated the earnings forecasts, as has slower U.S. capital spending. With the easing of trade tensions, the market may be able to look past weak earnings if trade talks continue without negative headlines.

Economic data releases, especially the employment report and inflation-related data, should help the Fed solidify its stance going into the July FOMC meeting. The market absolutely needs clear messaging from the Fed before meetings, particularly meetings in which the Fed funds futures market is pricing in rate cuts.