Contrast between US and Europe highlights Jackson Hole

Janet Yellen speaks with Mario Draghi at the Jackson Hole economic symposium, Aug. 22, 2014.
Bradly Boner | Bloomberg | Getty Images
Janet Yellen speaks with Mario Draghi at the Jackson Hole economic symposium, Aug. 22, 2014.

When it comes to economics and monetary policy, the Atlantic Ocean is growing wider.

While this year's Jackson Hole meeting of central bankers was about labor markets, the differences between Europe and the United States were a much-discussed topic in the official proceedings and on the sidelines last week.

Among the questions being asked were whether Europe should and would launch a quantitative easing program, whether the Fed could engineer a smooth exit from its easy monetary policies and whether it's sustainable for the world's two biggest economies to be on different growth and policy paths, with particular concern about whether Europe would drag down the U.S.

There were subtle hints that the gulf could be widening more rapidly as Fed Chair Janet Yellen sounded incrementally more hawkish and European Central Bank President Mario Draghi sounded more dovish.

Draghi made note of "diverging paths of U.S. and European monetary policies," and his first chart showed a widening gap in the employment data. "Unemployment in the U.S. continues to fall at more or less the same rate. In the euro area, on the other hand, it begins a second rise that does not peak until April 2013."

Yellen spent the bulk of her speech on Friday weighing the differing arguments about how much labor slack exists in the U.S. economy and how quickly it might tighten. This was in contrast to prior comments where she seemed more certain about the abundance of labor slack. Yellen's remarks raised the question: If the debate over labor slack is so even now, should policy really be quite so one-sided?

If the data come in better than expected, Yellen said, the Fed could move more quickly. She also said the Fed could move more slowly if that pace diminishes. But the evenhandedness of her remarks could lay the groundwork for a shift by Yellen to a somewhat more hawkish stance for earlier rate hikes than the market now assumes if the data continue to improve even at the current pace.

Read MoreWall Street expects really dovish Fed on rate hikes: Survey

The August CNBC Fed survey pegs the average "liftoff" date at July 2015, a month earlier than the prior survey. St. Louis Fed President Jim Bullard told CNBC in Jackson Hole that he supported a spring rate hike, a position that could end up being a compromise date between hawks on the committee who want to raise rates now and doves who want to wait until next summer.

When that exact moment arrives is less significant for the moment than the current momentum. Yellen's Fed is fundamentally in a place where it is reducing QE—purchases of government bonds to drive down interest rates—and debating internally the right moment to hike rates. That trajectory, barring a sharp and sustained decline in growth, seems inexorable.

By contrast, Draghi is embarking on new policies to expand the ECB's balance sheet. He signaled again in Jackson Hole he would do more than what's already on the agenda. The agenda includes another round of long-term refinancing operations and a program to purchase asset-backed securities, both of which have been announced. Draghi made clear that even outright QE is on the table, that is, an ECB purchase of sovereign bonds. One idea would have the bank buying in some proportional amount from all member countries.

Read MoreDeciphering labor markets will be hot topic at Jackson Hole

What's clear is that Europe's renewed bout of economic weakness came at a time when the ECB's balance sheet began shrinking, and the modest U.S. recovery came as the Fed purchased bonds and added substantially to its holdings. But for economists in the hallways at Jackson Hole, that simple divergence was not sufficient to argue for outright QE for Europe. They couldn't explain the mechanism by which a shrinking balance sheet led to Europe's growth decline.

They also were skeptical that efforts to drive down interest rates further would have much effect, noting that government bond rates for countries even on the European periphery were below those in the U.S.

Still, Draghi made no mention of waiting until the LTRO and asset-backed securities programs are in place before doing QE if inflation and inflation expectations were to tick down further. Draghi for the first time expressed his concern that inflation expectations in the euro zone appear to be becoming unanchored.

"The governing council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term," Draghi said.

—By CNBC's Steve Liesman