Settings files do not inherit from parent directories

Description

Claude Code settings files (.claude/settings.json, .claude/settings.local.json) do not inherit from parent directories. Only CLAUDE.md files traverse up the directory tree.

This means if you have a monorepo structure like:

repos/
├── .claude/settings.local.json   ← permissions defined here
├── repo-a/
├── repo-b/
└── repo-c/

Starting Claude Code from repos/repo-a/ will not pick up the permissions from repos/.claude/settings.local.json. You must either:

• Duplicate the settings into every sub-repo's .claude/settings.local.json
• Put everything in ~/.claude/settings.json (global)

Expected behavior

Settings should inherit from parent directories the same way CLAUDE.md files do, or there should be documentation clearly stating this limitation.

Current behavior

Settings only load from three fixed locations:

1. ~/.claude/settings.json (global)
2. .claude/settings.json (project root)
3. .claude/settings.local.json (project root)

No parent directory traversal occurs. This is not documented and is surprising when you have a multi-repo workspace with shared permissions.

Impact

• Users define permissions in a parent directory expecting them to apply to sub-repos — they silently don't
• Leads to repeated permission prompts that the user thought they had already resolved
• Forces either global settings (too broad) or per-repo duplication (maintenance burden)

Suggested improvements

1. Inherit settings from parent directories (same as CLAUDE.md)
2. Or add "extends": "../.claude/settings.local.json" support
3. At minimum, document the current behavior clearly