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Jackson Hole Sends Message Of Low Rates Continuing

Published 08/25/2014, 03:06 AM

Last week, the world’s central bankers met at Jackson Hole, Wyoming. This yearly retreat normally is watched by the market with great interest, and this year of course was no different. Without a doubt the one message that comes through loud and clear is that labor markets worldwide are still a drag on economic improvement. Because of this, it appears that most central banks around the world will continue to keep very loose monetary policies in an attempt to try to raise demand in general, and thereby increase employment.

Although international monetary policies are likely to go separate ways as economies recover in different speeds, jobs were without a doubt placed in the forefront of everybody’s minds as unemployment remains stubbornly high.

Both the Federal Reserve and the Bank of England appear ready to tighten monetary policy within a year or so, while the European Central Bank and the Bank of Japan appear ready to add fresh stimulus. In fact, both of the heads of those central banks came out and said so.

US Employment

Janet Yellen said that while the US hiring has improved and that the central bank is now looking towards point away from “extraordinary accommodation,” there is still a significant amount of slack in the employment of American citizens. With that, it is said that the labor market has yet to recover from the massive recession. She also said that the labor force participation rate would now take more precedents as well.

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Federal Bank of St. Louis President James Bullard said monetary policy may be tightened a bit earlier than officials had previously expected. The Kansas City Fed President Esther George suggested that the gains that we have seen in US employment could withstand higher interest rates. That being the case, it does appear that the Federal Reserve is at least talking about higher interest rates, which is a major shift.

European Deflation

The euro area unemployment rate is currently at 11.5%. ECB head Mario Draghi suggested that the policymakers at the central bank need to “stand ready to adjust our policy stance further”, after inflation stalled during the second quarter. There does seem to be mounting concern about deflation, as investors are betting on significant declines. Price gains are running at less than a quarter of the mandated 2% that the ECB normally tries to stick to, which of course could be exacerbated if consumers and companies pullbacks spending awaiting even weaker prices.

We are forming the trends for this fall

We may be forming trends for this fall. With the EUR/USD pair falling rather significantly, there was nothing coming out of this conference that suggested it should change anytime soon. Granted, there will be bounces from time to time, but ultimately the trend seems to be set. The USD/JPY pair appears to be ready to go higher, and that of course should get us into a longer-term buy-and-hold situation.

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On the other hand, the GBP/USD pair may end up going higher eventually, as we approach significant support. Nonetheless, we believe that the US dollar itself should do quite well over the course of the next several months and in fact may be entering a longer-term bull market.

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