Weekly economics thoughts of the week

Eugenio J. Alemán, PhD, Chief Economist Giampiero Fuentes, CFP®, Economist Matthew Ziyadeh, CFA, Investment Strategy Analyst

Trying to Decipher the Fed This week's FOMC decision was largely in line with expectations. While many market participants and Fed members anticipated another rate increase later this year, we remained in the camp that viewed the move as likely the last increase before the Fed adopted a wait-and-see approach, allowing geopolitical developments to stabilize and recent inflationary base effects related to the US-Iran war to fade.

What was less expected was the degree of uncertainty created by the updated Summary of Economic Projections (SEP), the dot plot, and the Chairman's press conference. Although we understand the Chairman's intention to reduce reliance on explicit forward guidance, eliminating guidance while simultaneously publishing the SEP and dot plot, and then distancing himself from those projections during the press conference, risks complicating rather than simplifying monetary policy communication. Under an inflation-targeting framework, clarity regarding the policy reaction function remains essential.

The Chairman argued that the Fed continues to remove monetary accommodation. Yet many measures suggest that monetary policy was already restrictive prior to the latest rate increase.

Household balance sheets provide one example. Total household debt has increased only modestly in nominal terms and has declined in real terms over the past year. This pattern is evident across most major categories. Credit card balances have risen in nominal terms but are essentially flat after adjusting for inflation, while mortgage and auto debt have posted outright declines in real terms. Rather than leveraging up, households continue to deleverage, a dynamic more consistent with restrictive financial conditions than accommodative monetary policy.1 Total Debt Balance Credit Card Debt Balance 12% 20% 10% 15% 8% 6% 10% .’4% 5% 2% 0% 0% -2% -5% -4% -6% -10% -8% % Total (YoY) Inflation-Adjusted (YoY) Credit Card (YoY) Inflation-Adjusted (YoY) Source: RJ Economics, FactSet, data as of 9/18/2026 1 We typically like to look at these series in real terms, that is, taking inflation out of the equation, to see what is happening to

these series without the distortion from inflation. In the graph we include both, year-over-year changes in nominal and real debt levels.

Mortgage Debt Balance Auto Debt Balance 15% 15%

Mortgage (YoY) Inflation-Adjusted (YoY) Auto Loan (YoY) Inflation-Adjusted (YoY) Source: RJ Economics, FactSet, data as of 9/18/2026

At the same time, household financial conditions remain relatively healthy. Measures of household financial soundness, particularly relative to income, do not suggest excessive financial stress despite elevated borrowing costs.

The income side of the household balance sheet, however, remains subdued. Growth in both nominal and real disposable personal income has been weak on a year-over-year basis. Historically, such softness has been more characteristic of periods surrounding economic downturns than of an economy expanding above potential. The disconnect helps explain why many households have not fully participated in the benefits of the current expansion, a reality reflected in both consumer sentiment and consumer confidence measures. Real vs Nominal Disposable Income (Year-Over-Year %) 40 20

-10 -30 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23 '25 Nominal Disposable Personal Income (YoY) Real Disposable Personal Income (YoY) Recession Periods - United States

Source: RJ Economics, FactSet, data as of 9/18/2026