* Yellen affirms view U.S. jobless rate understates slack
* Draghi: ECB ready to use all its tools to lift inflation
* ECB chief says downward pressures on prices likely
* Fed hawks fear inflation, want early U.S. rate hike
By Howard Schneider
JACKSON HOLE, Wyo., Aug 22 The Federal Reserve
should move cautiously in deciding when to raise interest rates
given the U.S. labor market remains bruised from the Great
Recession, Fed Chair Janet Yellen said on Friday amid calls from
policy hawks for a near-term rate hike.
In a speech at the Fed's annual central bank conference,
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.
Her remarks were followed by a speech by the head of the
European Central Bank, Mario Draghi, who said the ECB was ready
to use all the tools at its disposal to lift euro zone inflation
if it continued to drop. He said, however, that most factors
that had weighed on prices appeared temporary.
Together, the comments from Yellen and Draghi underscored
how both central banks were wrestling with the complexities of
labor markets still-wracked by the 2007-2009 financial crisis.
Yellen stood by her view that significant slack remains in
the U.S. economy, even as she nodded to the counter-arguments of
some of her colleagues who feel labor 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 pressed
their case for an early hike in benchmark rates, which the U.S.
central bank has held near zero since December 2008.
Philadelphia Fed President Charles Plosser, a voting member
of the Fed's policy panel this year, and two non-voters - St.
Louis Fed President James Bullard and Kansas City Fed President
Esther George - all sounded warnings on the risk of falling
behind the curve.
"I'd rather see us start to raise rates earlier and try to
go slow than to wait until the last minute," Plosser told
Reuters in an interview in Jackson Hole.
LABOR MARKET SLACK
Yellen said the Fed was struggling to determine the degree
to which the still-soft U.S. labor market was suffering from
long-term structural shifts beyond the central bank's reach as
opposed to more temporary factors that low rates could address.
Given the uncertainty, she said assessments of the labor
market "need to become more nuanced." Some officials argue the
welter of labor market data Yellen likes to parse offers little
useful information beyond the jobless rate and pace of hiring.
Financial market reaction to Yellen's remarks was muted,
with prices for U.S. stocks and most Treasury securities largely
unchanged. The dollar, however, moved higher, while the yield on
the 30-year Treasury bond fell.
"Janet Yellen confirmed the majority view of the (Fed's
policy committee): much more labor recovery is needed before the
Fed raises policy rates," said David Kotok, chairman of
Cumberland Advisors in Sarasota, Florida.
Draghi's remarks, in contrast, marked a rhetorical
escalation regarding the ECB's readiness to take further steps
to bolster a euro zone economy that failed to grow in the second
quarter and which has seen inflation drop to just 0.4 percent.
The ECB, he said, would "use all the available instruments
needed to ensure price stability over the medium term."
Still, he largely focused on the plight of labor markets,
calling for a more cohesive response from policymakers across
the single currency bloc to tackle unemployment.
"The way back to higher employment ... is a policy mix that
combines monetary, fiscal and structural measures at the union
level and at the national level," he said.
Yellen's speech included lengthy references to the
possibility the U.S. labor market may in fact be tighter then it
seems, and she acknowledged the Fed may have to raise rates
sooner and faster than expected.
But, overall, Yellen's remarks marked a defense of her
premise that significant slack remained in the jobs market, even
though she said the 2007-2009 financial crisis and recession
damaged the economy and work force in ways not fully understood.
The Fed has said it would wait a "considerable time" after
winding down a stimulative bond-buying program in October before
raising rates. Financial markets currently expect a rate hike
around the middle of next year.
Determining the degree of labor 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.
"If we're trying to solve a labor market problem, (Yellen's)
speech enumerated just how hard that is," Plosser told Reuters.
"Some of the things she alluded to we just can't fix."
(Reporting by Howard Schneider, Michael Flaherty and Jonathan
Spicer; Additional reporting by Luciana Lopez in New York;
Editing by Tim Ahmann and Paul Simao)