Keeping cards close to the chest

Key points

• After the vertiginous growth of the first half of 2021, some “digestion phase” was always to be expected in the US but some macro indicators point to some “organic” downside forces as well, amid the resurgence of Covid concerns.
• In this configuration, the Federal Reserve (Fed)’s prudence, expressed by Powell in Jackson Hole, is warranted.
• The European Central Bank (ECB) is not in a hurry to clarify the ambiguities left by its revised forward guidance.

As the summer ends, economic growth is moving away from the “spectacular rebound” of the first half of the year to a more sedate pace as the reopening is being digested. The issue though is how much of the slowdown is mechanistic – activity cannot “catch-up” forever – and how much is “organic”, to borrow a word from Philip Lane. The resurgence of pandemic concerns ranks first on the list of “organic forces”, and on this front, it is the US which is the most problematic.

A puzzling development is that the break between the number of cases and hospitalizations – the immediate benefit of the vaccines - which has been observed in Europe is not happening in the US, despite a very decent vaccination rate. A possible explanation is that the number of cases in the US is largely under-estimated, since testing is now very low there. The generally lower stringency of sanitary measures over there relative to Europe may explain why the delta variant is spreading so quickly.

These concerns may explain the recent softness in some macro indicators in the US, as spending on services may start to be impaired by consumers self-restraining. While this constitutes a clear downside risk to growth, we need to keep a sense of perspective. Policymakers’ appetite for wide-ranging restrictions is now very low, and we can see some European solutions to preserve economic activity – e.g., the sanitary pass launched in France and Italy – making their way in some of the key economic areas of the US, such as New York. We are facing a “dent” to the recovery, not a reversal.

Yet, the sanitary issues are clearly playing a role in the Fed’s prudence. In Jackson Hole Jay Powell did not offer any spectacular announcement and kept his cards close to his chest. The general “direction of travel” is tapering this year, but the precise timing can evolve depending on the balance of risks. The ECB as well, which has communicated a lot last week, is not in a hurry to clarify the ambiguities left by its revised forward guidance.