Fed Watcher • Macro Signal Synthesiser

Synthesising key US macro themes

As of 2026-01-25

Macro Signal Synthesiser Summary

Conditions-based macro assessment for Federal Reserve policy justification.

1. Macro Conditions Summary

US macroeconomic conditions present a nuanced picture, characterized by persistent disinflationary pressures across headline measures, a labor market that is broadly neutral but showing clear signs of cooling, and an easing liquidity environment with policy rates nearing a neutral stance. While nominal credit conditions remain stable, underlying systemic financial stress indicators suggest caution. The absence of explicit US growth signals creates a critical gap, requiring inferences from other themes.

Inflation dynamics are broadly disinflationary, with the overall Fed Inflation Signal in a COOL regime (1). However, policy-relevant PCE measures remain Neutral, with Core PCE at 2.83% year-over-year (2), and the CPI-PPI divergence has normalized to a NEUTRAL regime, suggesting potential re-emergence of pipeline cost pressures (3). Market-implied inflation expectations are STABLE and the inflation term-structure is Neutral (4)(5).

The US labor market is broadly assessed as NEUTRAL with underlying cooling tendencies (6). The Explicit Slack Gap is NEUTRAL and STABLE with MEDIUM confidence (7). While headline metrics are often neutral, deeper dives reveal the Employment Composition nearing a COOL regime (8), rising underemployment (U-6 rate) (9), and a Bearish Labor Market Turnover Differential (10). Wage Growth and Inflation is NEUTRAL, primarily due to easing labor tightness (11).

US domestic growth and business cycle signals are missing, but global growth indicators suggest a "Resilient Mid-Cycle with Metals-Led Tailwinds" (12), driven by industrial demand (13) and improving forward cycle proxies from rates flows (14). US Credit Conditions are largely NORMAL (15) or Neutral (16), with stable private credit growth (17). However, the Financial Stress Index (STLFSI4) remains Bearish due to an elevated z-score (18), indicating underlying systemic tension.

Liquidity and Monetary Conditions are predominantly easing. The Federal Reserve Liquidity Composite is Expansionary (19), driven by a substantial decline in ON RRP usage (20), and M2 money supply is in a Bullish regime (21). Real interest rates are Neutral and STABLE (22), with the policy stance estimated as NEAR NEUTRAL relative to the Explicit Neutral Rate (r*), which is itself STABLE (23). SOFR positioning shows speculative long-build anticipating a less tight policy path (24)(25).

Cross-Asset Positioning and Sentiment reveal NORMAL VIX volatility (26), but pockets of crowding (Metals spec long) (27) and significant risks such as High Squeeze Risk (28) and an active 'Supply Stress' macro theme (29). Extreme speculative long positioning in Fed Funds futures (30) indicates a crowded dovish rate expectation.

2. Why a Simple Taylor-Style Rule Is Insufficient

A simple Taylor-style rule provides a mechanical benchmark but is insufficient for guiding policy in the current macroeconomic regime. Its limitations stem from several critical factors. First, the policy reaction coefficients (e.g., weights on inflation and the output gap) are not static but are inherently time-varying, reflecting shifts in the economy's structural parameters and the central bank's evolving understanding of transmission mechanisms. Second, the relative weights placed on inflation versus labor market objectives often shift by regime, moving away from fixed parameters to accommodate dominant risks or mandate considerations (e.g., prioritizing employment support during a downturn or inflation control during overheating). Third, rigid rules fail to account for risk asymmetry, where the costs of undershooting or overshooting policy targets may not be symmetrical. In the current environment, the potential for an adverse growth shock may be weighed more heavily than a marginal inflation overshoot. Finally, uncertainty around point estimates of key variables (like r* or the natural rate of unemployment) and the persistence of macroeconomic regimes matter more than backward-looking averages. A flexible reaction function acknowledges that policymaking requires discretion to navigate these complexities, adapt to new information, and manage tail risks, rather than adhering to deterministic formulas.

3. Reaction-Function Relevant Signals

  • Inflation dynamics:
    • Levels vs direction: Overall Fed Inflation Signal is COOL (1), indicating receding headline pressures. Policy-relevant PCE measures are Neutral, with Core PCE at 2.83% YoY (2).
    • Persistence vs moderation: Moderation is evident in the Fed Inflation Signal and general expectations. However, core PCE shows some stickiness above target, and the CPI-PPI divergence has normalized to Neutral with positive momentum (3), suggesting potential re-emerging pressures.
    • Upside vs downside inflation risk: Upside risks stem from a sustained positive CPI-PPI divergence (3) and sticky core services inflation (2). Downside risks include further deceleration in the broad Fed Inflation Signal (1) and a more pronounced weakening of the labor market.
  • Labour market:
    • Composite labour regime: NEUTRAL with underlying cooling tendencies (6). Key components show softening, despite aggregate neutrality.
    • Explicit Slack Gap:
      • Direction: NEUTRAL (7)
      • Momentum: STABLE (7)
      • Confidence: MEDIUM (7)
  • Growth & demand:
    • Business-cycle phase: Explicit US growth data is missing. Global macro themes suggest a "Resilient Mid-Cycle" (12) with demand tailwinds from industrial metals (13) and improving forward cycle momentum from rates flows (14).
    • Momentum vs stall-speed risk: Global indicators suggest positive momentum, but the cooling US labor market suggests moderating domestic demand. The absence of direct US growth signals makes a definitive assessment challenging.
    • Reinforcement or contradiction from credit conditions: Credit conditions are NORMAL/Neutral (15)(16), with stable private credit impulse (17). However, the Bearish Financial Stress Index (18) presents a contradiction, suggesting underlying fragility that could weigh on future growth.
  • Financial conditions:
    • Liquidity impulse: Expansionary (19), driven by significant ON RRP unwinds (20) and Bullish M2 growth (21).
    • Real-rate regime: Neutral (22), stabilizing after a period of higher rates.
    • Policy stance relative to Neutral Rate (r*): NEAR NEUTRAL (23).
    • Directional drift of r* (RISING / FALLING / STABLE): STABLE (23).
  • Risk asymmetry:
    • Upside inflation vs downside growth risks: The balance is shifting. While inflation remains above target, the strong disinflationary momentum and cooling labor market suggest that the risks of an economic slowdown are increasing. The Bearish STLFSI4 (18) and High Squeeze Risk (28) in cross-asset positioning highlight potential financial vulnerabilities that could exacerbate a downturn. Therefore, downside growth risks are gaining prominence relative to upside inflation risks.
    • Signal alignment vs contradiction: There are significant contradictions. The cooling labor market (7) and COOL inflation signal (1) align towards an easing impulse, but sticky core PCE (2) and normalizing CPI-PPI (3) provide counter signals. Financial conditions are easing overall (19), yet systemic stress is elevated (18).
    • Bias toward continuation unless decisively broken: The current disinflationary trend and labor market cooling are persistent, suggesting continuation. However, underlying tensions and missing growth data mean the regime is not entirely stable, and could be prone to inflection if signals converge more decisively.

4. Macro Directional Bias (Conditions Only)

CUT

This reflects economic justification only, not timing, probability, or intent.

5. Confidence Score

MEDIUM

This assessment reflects economic justification, not policy timing or decision-making.