Judging by those weekend gaps among several forex pairs, it looks like a few groundbreaking announcements were made during the recent Jackson Hole Summit! Here’s a recap of what Fed Chairperson Yellen, ECB Governor Draghi, and BOJ Governor Kuroda said.
Yellen: U.S. labor market has yet to fully recover
Everyone and his momma had been hoping that Fed head Yellen could give more clarity on the Fed’s policy plans with her Jackson Hole testimony, as many expected her to downplay the relatively optimistic assessment included in the latest FOMC minutes. Yellen, however, decided to focus on sharing a bunch of labor market statistics that policymakers should be studying.
In her speech, she mentioned 19 data points that are part of a newly-developed Labor Market Conditions Index (LMCI). These include the unemployment rate, the labor force participation rate, job vacancies, hiring and quit rates among many others – all of which should provide a more comprehensive means of gauging labor market improvements.
While Yellen acknowledged that the U.S. jobs market has made considerable progress in improving after the financial crisis nearly half a decade ago, she also pointed out that it has yet to fully recover. “If progress in the labor market continues to be more rapid than anticipated, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter,” she mentioned.
But before dollar bulls could party like crazy, Yellen also added “Of course, if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate.” She sure knows how to play it safe, doesn’t she?
Draghi: Structural reforms needed in euro zone
As for ECB head Draghi, he didn’t shy away from expressing his worries about the euro zone, as he stated that the ECB would stand ready to adjust its policy stance further. After all, euro zone unemployment is at 11.5% and the region’s GDP flatlined during the second quarter.
In addition, Draghi pointed out that inflationary prospects remain weak, with the annual CPI still miles away from the central bank’s 2% target. Surveys have also revealed that investors are pricing in weaker price pressures, which might push the region in a deflationary spiral if companies start reducing spending and investment.
Although the ECB can give its best effort in terms of providing monetary stimulus, Draghi cautioned that accommodative policy can fall short if structural reform isn’t achieved in the euro zone. With that, Draghi also encouraged euro zone governments to improve their fiscal policies and allow for more economic flexibility.
Kuroda: Still watching inflation closely
Last but not least is BOJ Governor Kuroda, who seemed to sound a little more dovish than usual. Recall that BOJ policymakers and Japanese government officials had previously refused to admit that the economy is being weighed down by the April sales tax hike, but Kuroda recently acknowledged that there are still important challenges to be addressed.
In particular, Kuroda mentioned that the BOJ is focusing on price stability and might be ready to adjust monetary policy if inflationary pressures soften. He also shared that the Japanese labor market is seeing some improvements but that wage growth is also weak and that there is more reliance on part-time work. Bear in mind that the Japanese economy shrank by 1.7% in the second quarter with the sales tax hike weighing on spending, and the slack in the labor market might soon take its toll as well.
All in all, it appears that the market reaction to these testimonies has been bullish for the dollar and bearish for the euro and the yen. While Yellen didn’t exactly whistle an upbeat tune, she was a tad less dovish than expected, which let the dollar breathe a sigh of relief. Meanwhile, Draghi’s and Kuroda’s openness for further easing dragged the euro and the yen lower against its forex counterparts.
Do you think the price reaction to the Jackson Hole speeches marks the start of longer-term trends? Share your thoughts in our comment box or cast your votes in our poll below!