Forget summer festivals such as Glastonbury, the place to be this summer was the central bank conference in Jackson Hole, Wyoming.
Well, maybe not – but it is still an important event in the world of central banking in terms of helping to understand the thinking of policy makers. Some commentators thought Federal Reserve chairwoman Janet Yellen was slightly more hawkish. Or to be more precise, that she was marginally less dovish. In fact, she has not changed at all.
The data changed, and Ms Yellen has always said the Federal Reserve would react to the data. The data is now better, so unsurprisingly she sounds less dovish. The markets act as if this is a change because they are always seeking certainty from central bankers – a certainty that they cannot possibly provide.
One thing that has definitely remained unchanged is that Ms Yellen is not convinced the unemployment rate tells you everything you need to know about the health of the labour market.
She pointed, instead, to a recent working paper from the Federal Reserve, which constructed a composite index of labour market conditions. This index shows conditions are improving but they are a long way from pre-crisis health.
The 19 indices are grouped into nine characteristics of the labour market. With the exception of the rate of layoffs and vacancies, all of these remain much weaker than they were in the happier, pre-crisis days of 2006.
Should the Federal Reserve wait until the labour market is back to full strength, as Ms Yellen seems to suggest? The hawks would say that is too late. After all, do you only hit the brakes after you pass your destination, or do you start slowing down beforehand?
Ms Yellen is well aware of this argument, but for her the answer will depend on inflation, which is unlikely to show a sustained increase unless wages start to rise. And wage growth is something she is concerned may take a long time to materialise. In fact, it might be that wages have already been too high.
In spite of Jackson Hole being a US conference, Mario Draghi, president of the European Central Bank, stole the show. A key thing he pointed out was the difference in the participation rate in the labour market of the eurozone and US.
Because so many people in the US stopped looking for work, whether due to retirement, education or inability to find a job, the number registered as unemployed looks very low. Combined with the small rise in the participation rate in the eurozone, it explains even more.
Perhaps austerity had such an impact on disposable incomes that more people in the eurozone had to look for work. Perhaps people in the US gave up on job searches. But whatever the reasons, the difference in participation rates has a big impact.
On one side we have the ECB, which remains dovish because of a high unemployment rate, and on the other we have the Federal Reserve, which remains dovish in spite of falling unemployment.
The participation rate is the new variable that explains the gap, but the behaviour of wages is also adding confusion. The times when monetary policy decisions could be based on a straightforward look at inflation and unemployment are over.
Joshua McCallum is head of fixed income economics at UBS Global Asset Management
