What are the most powerful bankers in the world talking about this week in Jackson Hole, Wyoming?

Powerful Central Bankers gather annually in the lovely town of Jackson Hole, Wyoming, to debate high level policy issues in an informal yet academic format.  Over the years, the Jackson Hole “geek festival” has become more frontline as it was used occasionally by ex-Chairman Bernanke to announce major policy decisions such as Quantitative Easing.

This year meeting, taking place this week, aroused analysts’ interest being the first one showcasing Janet Yellen as Federal Reserve’s Chairwoman.  People’s attention was tuned in on each and every word to gauge any new information on the Fed’s potential new course in monetary policy.

Chairwoman Yellen in her speech this morning framed decisively the issue at hand in the labor market.  She analyzed the current slack in employment and debated whether our metrics of slack assessment are indeed working.  Correctly assessing the employment situation is key in getting monetary policy right (and from an analyst’s view, forecasting correctly future policy moves). 

Based on her words, rate hikes might come sooner rather than later if the improvements in the labor market continue to be faster than anticipated.  The other element is inflation expectations; official statistics are showing that inflation is still subdued, perhaps due to global slack (Europe seems behind the curve once again) and maybe structural issues such as demographics.  However, inflation can flare up at any time and that would be a game changer for the timing of monetary policy inversion.  We note that historically, central banks always seem to be late at major inflation turning points.

In any case, Yellen did not sound overly hawkish but the wind is certainly shifting and more volatility in the interest rates and FX universe may be coming soon.

A lot of interest surrounded Mr. Draghi as well. The ECB chief is expected to eventually be forced to make good on his promise to do whatever it takes to save the Euro. In these times of increasing economic slowdown in Europe (especially worrying are the slowing stats out of Germany and the Ukrainian situation), a Euro-style “shock and awe” might have to happen.  Draghi argued that increased flexibility on fiscal policy across the euro zone and more efforts to change the region’s employment dynamics are key components for a successful turn-around of Europe.

Draghi believes the ECB is doing its job and, once more, he encouraged governments to increase activity in the fiscal policy sphere.  However, Draghi sees a return to high levels of employment in the region as not