US Monetary Policy

Rate changes are transmitting within historical norms across multiple active channels, but the housing activity channel is structurally impaired by the mortgage lock-in effect and the consumer credit channel is blocked for lower-income and subprime borrowers, creating pronounced distributional asymmetry.

Equity wealth effects are the dominant transmission mechanism — the FOMC explicitly attributes consumer spending resilience to gains in household wealth — operating through equities rather than the traditional housing pathway, with the credit and exchange rate channels playing secondary roles.

Tariff-induced cost-push on core goods is the dominant marginal driver, with demand permissive but not independently accelerating prices; shelter disinflation provides a structural offset and expectations remain anchored across long-term measures.

YoY core inflation is decelerating but convergence has slowed to a near-stall in the 2.5-3.0% zone; tariff pass-through is the primary impediment while structural disinflationary forces (shelter, wages, productivity) remain intact and expectations are anchored — placing the regime closer to the PERSISTENT boundary than TRANSITORY.

NFCI at -0.568 is the loosest reading in the trailing 12 months with accelerating loosening, credit spreads are below 5-year medians and compressing, primary issuance markets are fully open with strong volumes, and money market conditions are stable — conditions are running significantly looser than the borderline-neutral policy rate of 3.50-3.75% would predict.

Aggregate bank lending standards are at the median level since 2011 with slight further easing in CRE and consumer categories, loan growth continues at a moderate pace, and wholesale issuance is strong — but small business credit remains relatively tight and consumer delinquencies sit above pre-pandemic norms, preventing an EXPANDING classification.

The labor market has shifted from tight to loosening, with JOLTS openings-to-unemployed ratio below 1.0 (~0.91), narrow job growth composition concentrated in defensive sectors, and a low-churn equilibrium (low hiring, low quits, low layoffs) that masks fragility beneath surface stability; benign claims data prevent reclassification to SLACK.

AHE YoY at 3.7% is decelerating but has stalled just above the 3.0-3.5% target-consistent range, with the 3-month annualized rate at 3.5% (upper boundary); the wage-price feedback loop is not active, but the absence of ECI, productivity, and unit labor cost data prevents full assessment of the wage-inflation nexus.

Fiscal policy is mildly stimulative and partially offsetting residual restrictive elements of monetary policy held near neutral, creating a net slightly expansionary policy configuration consistent with the Fed staff projection of above-potential GDP growth through 2028.

Fed staff and participants explicitly characterize fiscal policy as a sustained demand growth support through 2028; no evidence of fiscal consolidation from any source; post-shutdown normalization adds near-term positive impulse, though magnitude is unquantifiable without primary fiscal data.

Dollar depreciation compounds tariff-driven import price inflation — FOMC staff revised core import price projections higher, confirming the combined effect is material to the inflation outlook; BOJ normalization presents latent risk to US long-term yields but has not yet actively manifested; capital flows and EM conditions are stable.

Trade-weighted broad dollar down 7.6% over 12 months across all major pairs, driven by forward-looking rate differential compression as markets price deeper Fed cuts relative to peers; depreciation is orderly and decelerating, with US growth outperformance partially offsetting.