Fiscal dominance locks in US monetary policy trajectory, Alden says

Lynn Alden describes the current US macro environment as one of fiscal dominance rather than monetary dominance, characterized by deficits of 7% of GDP and a debt-to-GDP ratio exceeding 100%. She argues that 25 basis point rate hikes are largely irrelevant to the broader money supply because higher rates increase interest expense on the massive stock of debt, which is spent back into the economy, offsetting the restrictive effect on lending. Alden notes that the Federal Reserve's balance sheet bottomed in late 2025 due to bank liquidity floors, and current reserve management purchases are intended to maintain adequate cash levels rather than stimulate the economy. She expects the Fed to hold rates in the near term, with a base case of one or two hikes this year. Alden predicts that political gridlock following midterms will prevent meaningful deficit reduction, locking in sustained deficits and money supply growth of 5% to 8% annually. She views this trajectory as business as normal and supportive of assets that hedge against currency debasement.