ESSENTIALS OF THE MONETARY POLICY

François Dupuis, Vice-President and Chief Economist Mathieu D’Anjou, Senior Economist • Francis Généreux, Senior Economist • Hendrix Vachon, Senior Economist

Desjardins, Economic Studies: 514-281-2336 or 1 866-866-7000, ext. 5552336 • desjardins.economics@desjardins.com • desjardins.com/economics

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ACCORDING TO THE FED

f The Committee decided to maintain the target range for the federal funds rate at 1.50% to 1.75%.

f Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly.

f On a 12‑month basis, both overall inflation and inflation for items other than food and energy have moved close to 2%. Market‑based measures of inflation compensation remain low; survey‑based measures of longer‑term inflation expectations are little changed, on balance.

f Inflation on a 12‑month basis is expected to run near the Committee’s symmetric 2% objective over the medium term. Risks to the economic outlook appear roughly balanced.

COMMENTS

The Fed’s lack of action today comes as no surprise. The mere fact that no new forecasts from Fed leaders were issued and no press conference was held by Jerome Powell during this meeting was practically a guarantee of the status quo. Since the start of the process to normalize rates in 2015, no major decision has been made outside the March, June, September and December quarterly meetings. Furthermore, the futures market deemed the likelihood of a rate hike today to be just 4.6%, and only 2 in 93 forecasters polled by Bloomberg anticipated an increase.

That said, the statement published today nonetheless sets the stage for the next meeting, in that a rate hike of 25 basis points in June seems virtually certain. While, on the one hand, the Fed

does mention recently weak consumption growth, it does not appear worried. The Fed did not, however, reiterate its statement made in March, when it signaled that the economic outlook had improved. Nevertheless, our scenarios predict that growth should rebound in the spring. On the other hand, the job market continues to be very robust, despite the temporary lull in March. Inflation has also recently neared Fed targets. For the first time since January 2017, the annual change in the consumption expenditure deflator reached 2.0% in March. That of the core deflator, which excludes food and energy, went up from 1.6% to 1.9% between February and March.

At the previous meeting, Fed leaders called for two further key rate increases in 2018. However, they were quite close to signalling three. The Fed might take that step in June if inflation shows a little more teeth and if the economy, stimulated by the federal government’s budget policies, does actually rebound.

IMPLICATIONS

Our scenarios are similar to those established by the Fed in March; we expect two additional key rate increases this year, probably in June and September. However, there could easily be an extra one.

Francis Généreux, Senior Economist

Federal Reserve (Fed)The Fed Seems Poised to Continue Raising Key Rates in June

ECONOMIC STUDIES | MAY 2ND, 2018

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ECONOMIC STUDIES

2MAY 2ND, 2018 | ESSENTIALS OF THE MONETARY POLICY

Date Central banks Decision Rate

17 Bank of Korea s.q. 1.5017 Bank of Canada +25 b.p. 1.2522 Bank of Japan s.q. -0.1025 European Central Bank s.q. 0.0025 Bank of Norway s.q. 0.5031 Federal Reserve s.q. 1.50

5 Reserve Bank of Australia s.q. 1.507 Reserve Bank of New Zealand s.q. 1.757 Bank of Brazil -25 b.p. 6.758 Bank of England s.q. 0.508 Bank of Mexico +25 b.p. 7.50

14 Bank of Sweden s.q. -0.5026 Bank of Korea s.q. 1.50

5 Reserve Bank of Australia s.q. 1.507 Bank of Canada s.q. 1.258 European Central Bank s.q. 0.008 Bank of Japan s.q. -0.10

15 Bank of Norway s.q. 0.5015 Swiss National Bank s.q. -0.7521 Reserve Bank of New Zealand s.q. 1.7521 Bank of Brazil -25 b.p. 6.5021 Federal Reserve +25 b.p. 1.7522 Bank of England s.q. 0.50

3 Reserve Bank of Australia s.q. 1.5011 Bank of Korea s.q. 1.5012 Bank of Mexico s.q. 7.5018 Bank of Canada s.q. 1.2526 European Central Bank s.q. 0.0026 Bank of Sweden s.q. -0.5026 Bank of Japan s.q. -0.10

1 Reserve Bank of Australia s.q. 1.502 Federal Reserve s.q. 1.753 Bank of Norway9 Reserve Bank of New Zealand

10 Bank of England16 Bank of Brazil17 Bank of Mexico23 Bank of Korea30 Bank of Canada

5 Reserve Bank of Australia13 Federal Reserve14 European Central Bank14 Bank of Japan20 Bank of Brazil21 Bank of England21 Bank of Norway21 Bank of Mexico21 Swiss National Bank27 Reserve Bank of New Zealand

EMPTY

January

February

March

April

May

June

Schedule 2018 of Central Bank MeetingsDate Central banks Decision Rate

3 Reserve Bank of Australia3 Bank of Sweden

11 Bank of Korea11 Bank of Canada26 European Central Bank30 Bank of Japan

1 Bank of Brazil1 Federal Reserve2 Bank of England2 Bank of Mexico7 Reserve Bank of Australia8 Reserve Bank of New Zealand

16 Bank of Norway30 Bank of Korea

4 Reserve Bank of Australia5 Bank of Canada6 Bank of Sweden

13 European Central Bank13 Bank of England18 Bank of Japan19 Bank of Brazil20 Bank of Norway20 Swiss National Bank26 Reserve Bank of New Zealand26 Federal Reserve

2 Reserve Bank of Australia4 Bank of Mexico

17 Bank of Korea24 Bank of Sweden24 Bank of Canada25 European Central Bank25 Bank of Norway30 Bank of Japan31 Bank of Brazil

5 Reserve Bank of Australia7 Reserve Bank of New Zealand8 Bank of England8 Federal Reserve

15 Bank of Mexico29 Bank of Korea

3 Reserve Bank of Australia5 Bank of Canada

12 Bank of Brazil13 European Central Bank13 Bank of Norway13 Swiss National Bank19 Bank of Japan19 Federal Reserve20 Bank of England20 Bank of Sweden20 Bank of Mexico

July

August

September

October

November

December

NOTE: Certain banks may decide to change rates in-between the scheduled meetings. The abbreviations s.q. and b.p. correspond to status quo and basis points respectively.