Comments by central bankers were moving markets on Monday.
ECB President Mario Draghi and his US counterpart Janet Yellen both spoke at their annual gathering at Jackson Hole in the United States.
As a result of Draghi’s speech the euro to fell to its lowest against the dollar in nearly one year and eurozone shares and government bonds rowse.
Draghi said the ECB was ready to use all the tools at its disposal to lift eurozone inflation if it continued to drop.
That immediately had investors thinking of money printing – quantitative easing (QE) to give it its technical name – to stimulate the economy, avoid deflation and stop the eurozone falling into the kind of long-term economic stagnation that Japan has suffered.
But Draghi seems still to be in wait-and-see mode, pointing out that most of the factors that have pulled down prices appear to be temporary.
Before embarking on QE, the ECB wants to assess the effectiveness of its new targeted loans to commercial banks which are intended to get them lending more to businesses and individuals.
Eurozone consumer prices grew 0.4 percent in July and are expected to post 0.3 percent growth in August. The ECB’s target is just below 2.0 percent.
Growth not austerity
Analysts have commented that Draghi’s landmark speech on Friday did mark a major shift in ECB policy away from a focus on austerity towards reviving growth.
He said it would be “helpful for the overall stance of policy” if fiscal policy could play a greater role alongside the ECB’s monetary policy, adding “and I believe there is scope for this”.
Up till now the ECB has supported the German-style fiscal austerity that has been in place since the outbreak of the eurozone crisis. Draghi now seems to be positioning himself closer to France and Italy’s call for fiscal stimulus.
“It’s an enormous change,” said ING economist Carsten Brzeski.
“It is admitting that the recovery might not come, that the eurozone’s problems go beyond structural reforms and austerity measures. It might be a U-turn for how the ECB looks at fiscal policy but not so much for how it looks at monetary policy.”
The Federal Reserve should move cautiously in deciding when to raise interest rates given the US labour market remains bruised from the Great Recession, Fed Chair Janet Yellen said in her keynote speech at the Fed’s annual central bank conference.
She was speaking amid calls from policy hawks for a near-term interest rate hike.
Yellen laid out in detail why she feels the unemployment rate alone is inadequate to evaluate the strength of the jobs market and why the central bank needs to step gingerly.
Yellen stood by her view that significant slack remains in the US economy, even as she nodded to the counter-arguments of some of her colleagues who feel labour markets are tighter than she believes and inflation a risk.
“There is no simple recipe for appropriate policy,” she said, arguing for a “pragmatic” approach that focuses on incoming data without committing to a preset policy path.
Ahead of her comments, a number of top Fed officials have been pressing their case for an early hike in benchmark rates, which the US central bank has held near zero since December 2008.
Determining the degree of labour market slack has become the central debate at the Fed. Yellen wants to be sure employment has recovered as fully as possible before raising rates.
In contrast, the inflation “hawks” worry that more months of near-zero rates will cause inflation or possible asset bubbles.