Inflation: The Black Swan Markets Refuse to See
While inflation expectations remain solidly anchored around 2%, a recent decision by the Federal Reserve could nevertheless be a game changer, according to Laurent Chaudeurge, a member of the investment committee at BDL Capital Management.
Why monetary creation hasn't caused inflation since 2008
On December 1, 2025, the Federal Reserve ended its Quantitative Tightening program, allowing its balance sheet to grow again. Officially, this is a technical adjustment aimed at preventing any shortage of bank reserves. However, the timing raises questions. As Ray Dalio, founder of Bridgewater Associates, points out, creating reserves when valuations are high, credit spreads are historically low, and unemployment is limited to 4.3% is not typical at the end of an economic cycle.
To understand why this decision might have consequences different from those observed after the 2008 financial crisis, it’s essential to revisit the profound changes in the monetary system that occurred during that time. Before 2008, monetary transmission was direct: low liquidity constraints, no remuneration of reserves, and limited capital requirements encouraged rapid money circulation into the real economy.
After the crisis, everything changed. Quantitative Easing increased bank reserves from a few tens of billions to nearly $3 trillion, without this liquidity significantly boosting credit. Three barriers progressively blocked the mechanism. First, the introduction of very stringent liquidity ratios, which tripled to quintupled banks’ liquid asset requirements. Next, the Fed’s remuneration of bank reserves, encouraging institutions to retain their liquidity rather than lend it. Finally, the sustained strengthening of capital requirements, making capital scarcer and more expensive.
The result: despite more than $8 trillion added to the Fed’s balance sheet since 2008, the velocity of money has plummeted to about 1.12, a historic low, explaining the prolonged absence of inflationary pressure.
The Risk of Simultaneous Unwinding
The risk identified today does not stem from a single factor, but rather from the potential simultaneous challenge to these three safeguards. By halting quantitative tightening at the peak of the cycle, the Fed stops acting as a brake and could become an accelerator. At the same time, there are increasing pressures to ease regulatory constraints on banks, reduce capital requirements, and speed up the reduction of key interest rates.
According to Laurent Chaudeurge, such a movement could free up between 1.5 and 2 trillion dollars in additional lending capacity. It would take just a portion of this sum to be converted into bank loans to quickly boost the growth of money in circulation. By combining an 8 to 12% increase in this measure, a pace already seen in 2020-2021, with a moderate rise in velocity to 1.30-1.35, the nominal GDP growth could mechanically reach 6 to 8%.
In a scenario where real growth remains close to 2%, underlying inflation would naturally settle between 4 and 6%, well beyond current market expectations, which remain anchored around 2.2 to 2.4% for 2027-2028.
Inflation: The Real Black Swan of the Upcoming Cycle
This very discrepancy is what makes inflation the true « black swan » of the upcoming cycle. It's not an invisible risk, but rather an assumption that investors have stopped questioning, convinced that the post-2008 monetary framework is immutable. However, as Laurent Chaudeurge points out, it is not. The Fed's decision might very well be the first sign of this change.
This content has been automatically translated using artificial intelligence. While we strive for accuracy, some nuances may differ from the original French version.
