Restrictive Yields Will Be The Fed’s Waterloo

Restrictive monetary conditions, from higher yields and tighter lending conditions, are the Fed’s “Waterloo.”

If you don’t remember, the “Battle of Waterloo” was fought on June 18th, 1815. The battle was a catastrophic defeat for the Napoleonic forces and marked the end of the Napoleonic Wars. Before that defeat, Napolean had a successful campaign of waging war in Europe.

Today, the Federal Reserve has successfully waged a war against inflation. Of course, as is always the case throughout history, the Fed campaign has consistently met its eventual “Waterloo.” Rather, the point where rate hikes and tighter monetary policy eventually cause a problem somewhere in the financial system. Such is particularly the case when the Fed funds rate exceeds levels associated with previous crisis events.

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Much like Napoleon, who was confident entering the battle of Waterloo and the eventual victory, the Fed remains convinced of its eventual success. Following the most recent FOMC meeting, the Federal Reserve reiterated its “higher for longer” mantra and upgraded its economic forecast to include a “no recession” scenario.

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