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Rocky Balboa (Sylvester Stallone): “You have to hit rock bottom to get back up.”

Quote from Rocky III, a 1982 movie written by and starring Sylvester Stallone.

The international economy may not have hit rock bottom, but surely it has been heavily hit by the Covid-19 pandemic. However, governments, businesses, institutions, and citizens, just like Rocky, are fighting “to get back up”. And to get back up it is essential to have an adequate monetary policy: for this reason, the spotlight of the markets was focused on the recent conference in Jackson Hole (USA), the traditional end-of-summer meeting of central banks.

Federal Reserve Chief Jerome Powell said the start of tapering - the reduction of monetary stimulus - is “possible” by the end of the year. But an excessively hasty intervention could prove to be “very damaging”, given the climate of uncertainty fueled by some vulnerabilities in the international economy and by the spread of the Delta variant.

Powell, therefore, did not provide a precise roadmap for the easing of Fed purchases, which today stand at $ 120 billion, on monthly basis, and stressed that tapering “is not a direct signal of a near increase in interest rates”. Regarding inflation, the banker admitted that the flare-up in prices “causes concern” but he is convinced that the jump is temporary and that we can return to the target of 2%.

The Fed chairman was clear: “Despite today’s challenges, the US economy is on the right track” for a solid labor market and “high levels of employment and participation”, as well as “widely shared wage benefits.” Furthermore, he recalled how “before the pandemic, we saw the extraordinary benefits that a strong labor market can offer to our society. Labor market conditions are improving but they are turbulent, and the pandemic continues to threaten not only health and life but also the economic activity, “and the Fed will continue to monitor Covid-19’ spread developments. Thus, according to the institute, while considering the current difficulties with all the necessary precautions, the economy can “get back up” (as Rocky would say) even with a less accommodating monetary policy. Powell, as previously mentioned, considers this possibility but does not want to rush it. However, the Fed’s so-called “hawks” are pushing to implement tapering as soon as possible.

Pushing this line, which is gaining more and more support in the Board, is the president of the Atlanta Fed, Raphael Bostic, who in an interview with CNBC urged: “Let’s start tapering and let’s do it quickly”. Philadelphia Fed Chairman Patrick Hacker also said that starting a plan to reduce purchases “is better sooner than later” because the rise in inflation “may not be transitory.” Also Loretta Mester, president of the Cleveland Fed, is with the “tough”: “we don’t need the accommodative policy we previously needed,” she said bluntly.

Whether the hawks or Powell’s prudential stance will prevail, it seems certain that the Fed and the European Central Bank will be increasingly distant. In any case, the ECB aims to maintain an expansionary policy for longer than its US counterpart. The Eurotower will be “patient” - Christine Lagarde said after the July board - “none of us want a premature tightening” of monetary policy. The chairman of the ECB had also stressed that the recovery of the eurozone economy is on the march but the pandemic continues to represent a dangerous shadow. Unlike the Fed, Frankfurt appears willing to postpone the debate on tapering.

Even the hard wing of the Eurotower appears calmer, after the pressures of recent months, to put an early end to the PEPP, the over 1,800 billion euro securities purchase plan against the pandemic emergency. In addition to the Delta variant, there are probably other issues of concern, especially in Berlin. The Ifo index, which measures confidence among German companies, fell in August to 99.4 points from 100.8 in July, with a marked deterioration in expectations. Turning to the inflation chapter, instead, the European Central Bank expects further rises and then a fall in 2022.

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