In Italy, a drastic acceleration of the reform process is necessary for a number of reasons. Although there is no guarantee that Renzi’s attempt will be successful, political reasoning suggests that this is not a bluff. FOMC: rates back…
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on the agenda.
– The flash crisis which forced Prime Minister Letta to resign from office is rapidly being resolved, with the formation of a government led by the leader of the PD party, Matteo Renzi, and supported by the same coalition. The names of the Cabinet members will be announced by this Saturday, when the new government is due to be sworn in by the President of the Republic. The government’s agenda will be disclosed with the incoming Prime Minister’s speech before Parliament, prior to the confidence vote, although some broad indications have already been provided and more will be released in the next days. The operation, which has had a political cost for its main actor, will make sense to voters only of it triggers a clear acceleration in the pace of reform. It is no surprise, therefore, that Renzi has announced his intention to concentrate an impressive amount of work and measures in the first 100 days of his government’s activity. The electoral reform is the first step (already begin debated at the House, but on standby also due to the crisis), together with the presentation of a constitutional reform proposal to change the functions and composition of the Senate; the following month the labour market reform would be tackled. Then the public administration reform would be taken on, followed in the fourth month by the fiscal reform. The indications given hitherto on the proposed strategy in reforming the labour market and restructuring the fiscal system are encouraging – although it is appropriate to suspend judgement until the measures are defined in greater detail. The institutional reform is also important, as the future governability of the country needs to be guaranteed, and the legislative and administrative processes made more efficient.
– Another explicit objective of the reform process is to be able to enter talks with the European authorities with a package of approved structural measures already in place, so as to obtain a more gradual convergence path towards medium-term fiscal objectives. The reform-for-flexibility swap seems viable, in our view, as long as flexibility is used to implement measures capable of contributing to the relaunching of potential growth. In any case, things won’t be easy: the time required by law-making procedures is such that the government will probably have no more than reform “proposals” to show when the Italian stability plan is examined by the European Commission and by the Council. Also, the government coalition’s discipline in implementing a clear and univocal strategy needs to be tested on the field.
– The minutes of the January FOMC meeting confirm that the determination of policy rates and the management of expectations is now the Fed’s main focus, whereas the tapering process is becoming a marginal aspect of monetary policy. The Committee has started to discuss the timing of the first rate hike. According to “a few” participants, it might be appropriate to increase the federal funds rate “relatively soon”; “a couple” noted that some standard policy rules seemed to suggest that the fed fund rate should be raised above its current level “before the middle of this year”, although “others” suggested that the in the aftermath of the financial crisis the application of normal rules would be inappropriate. Therefore, there seems to be no consensus for the time being on bringing forward the date of the initial hike: “several” participants observed that market expectations are “reasonably well aligned” with their own projections. As regards other issues, participants agreed that a change in forward guidance would “soon” be appropriate, to provide information about the Committee’s decisions on fed funds after the 6.5% threshold is crossed. On this aspect, a range of views were expressed: some participants favour the confirmation of “quantitative” guidance, whereas others prefer a change towards a “qualitative” approach. Several participants stressed the importance of placing more emphasis on the distance of inflation from the 2% mark; others suggested to include in the guidance the possibility of responding to changes in financial conditions. As for the tapering process, there was consensus over a 10 billion dollar reduction in purchases at each FOMC meeting, save for scenario changes. The minutes support forecasts for 1) a change in forward guidance in March; 2) confirmation for the time being of the message that rates will remain stable until around mid-2015; 3) the possibility that the rate hike path from the second half of 2015 onward may prove faster than the one currently priced in by the market (and indicated in the Fed’s projections).
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