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Published On: Mon, Aug 25th, 2014

Fed Chair Yellen advises wariness on timing of interest rate hike, ECB Draghi expresses bank readiness to act

Janet Yellen said at the Jackson Hole gathering that the Fed should be careful with the timing of interest rate hikes, given the state of the US labor market; ECB Mario Draghi stated readiness to use all available tools to raise the euro zone inflation if its declining persists.

Janet Yellen said at the Jackson Hole gathering that the Fed should be careful with the timing of interest rate hikes, given the state of the US labor market

On Friday, Janet Yellen said that the Federal Reserve should be wary with respect to the timing of raising interest rates, as the US labor market has not yet fully recovered from the recession. The Fed Chair substantiated her stance with details on why she thought the unemployment rate did not suffice for evaluating jobs market strength.

Mario Draghi stated that the ECB is ready to use all the tools at its disposal to stimulate inflation in theeuro zone if its decline continues. Furthermore, he said that most factors suppressing prices looked temporary.

The comments provided by Yellen and Draghi put the focus on the difficulties both central banks have in coping with labor markets complexities,as those markets are still suffering from the 2007-2009 financial crisis.

Yellen holds the firm view that the US economy still retains significant slack, although she recognizes that some of her colleagues have right in indicating labor markets are tighter and inflation is a hazard. Overall, she is for adopting a pragmatic approach, not sticking to preset policy, focusing on incoming data.

Before Janet Yellen’s comments, a number of high ranking Fed officials insisted on an early hike in the benchmark rates which have been held around zero since December 2008.

Yellen pointed the Fed had difficulty in determining the extent of US labor market suffering from long-term structural shifts. She said that in an uncertain environment jobs market assessment should be more nuanced.

The reaction of financial markets to Yellen’s remarks was not significant, prices of USstocks and of most Treasury securities stayed mostly unchanged. There was, however, a rise in the dollar and a decline in the 30-year Treasury bondsyield.

Draghi’s words caused a stir with regard to ECB readiness for further support of the currency block’s economy,which failed to grow in the second quarter and had its inflation drop to 0.4 percent. Draghi said the bank would use all tools from its arsenal to achieve medium-term price stability. He commented on labor markets, demanding a more united euro zone reaction on coping with unemployment. He explained that the policy mix should involve monetary, fiscal and structural measures, both on national and on euro zone level.

The Fed announced it is still some time before hiking rates. The current financial markets expectations for a rate increase are for mid-2015.

The debate was focused mostly on the determination of the labor market slack extent. Yellen stated employment should have recovered to the highest possible level before raising rates. On the other side, the inflation “hawks” among the Fed members expressed anxiety about the extended hovering of interest rates near zero, which would lead to inflation or perhaps to asset bubbles.

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