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

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2017, Desjardins Group. All rights reserved.

ACCORDING TO THE FED

f The Committee decided to raise the target range for the federal funds rate to 1.25% to 1.50%.

f Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.

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

f Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

COMMENTS

After taking a break during the September quarterly meeting, the Fed’s leaders began raising U.S. key interest rates again. This new increase does not come as a surprise. It was signalled in the forecasts published by the Fed in September, and the market was 98% certain that it was coming. However, it is worth noting that two voting members of the monetary policy committee dissented from today’s decision, preferring the status quo.

What can we expect from the Fed in 2018? The leaders’ median forecast predicts three further hikes by the end of next year. The top of the target range for federal funds would reach 2.25%. These rate increases would be justified by stronger economic growth than what was forecast in September. The Fed has

slightly upgraded its real GDP growth forecast for the end of 2018, from 2.1% to 2.5%. At a press conference, Janet Yellen signalled that this forecast includes the anticipated effects of the tax reform currently before Congress. The Fed also expects the jobless rate to slip just below 4%, reaching 3.9% in the fourth quarter. However, the Fed’s median forecasts project virtually no change in total inflation or core inflation, expected to be 1.9% at the end of 2018.

For 2019, the Fed foresees slightly weaker real GDP growth, posting an annual change of 2.1% in the final quarter. The jobless rate would remain unchanged from 2017. Under the circumstances, the median forecast is between two and three key interest rate hikes, with between one and two projected for 2020.

IMPLICATIONS

Fed leaders’ forecasts are quite similar to our own expectations. The combination of better economic conditions and subdued price growth should continue to prompt the Fed to gradually increase its rates as it did in the past year. Three rate hikes of 25 points each, with the next one coming in March, seem appropriate. Jerome Powell’s replacement of Janet Yellen as Fed Chair in February should not be a game-changer.

Francis Généreux, Senior Economist

Federal Reserve (Fed)The Last Rate Hike for Janet Yellen... But Not for the Fed

ECONOMIC STUDIES | DECEMBER 13, 2017

#1 BEST OVERALLFORECASTER - CANADA

ECONOMIC STUDIES

2DECEMBER 13, 2017 | ESSENTIALS OF THE MONETARY POLICY

Date Central banks Decision Rate

11 Bank of Brazil -75 b.p. 13.0012 Bank of Korea s.q. 1.2518 Bank of Canada s.q. 0.5019 European Central Bank s.q. 0.0030 Bank of Japan s.q. -0.10

1 Federal Reserve s.q. 0.752 Bank of England s.q. 0.256 Reserve Bank of Australia s.q. 1.508 Reserve Bank of New Zealand s.q. 1.759 Bank of Mexico +50 b.p. 6.25

15 Bank of Sweden s.q. -0.5022 Bank of Korea s.q. 1.2522 Bank of Brazil -75 b.p. 12.25

1 Bank of Canada s.q. 0.506 Reserve Bank of Australia s.q. 1.509 European Central Bank s.q. 0.00

15 Federal Reserve +25 b.p. 1.0015 Bank of Japan s.q. -0.1016 Bank of England s.q. 0.2516 Bank of Norway s.q. 0.5016 Swiss National Bank s.q. -0.7522 Reserve Bank of New Zealand s.q. 1.7530 Bank of Mexico +25 b.p. 6.50

4 Reserve Bank of Australia s.q. 1.5012 Bank of Korea s.q. 1.2512 Bank of Brazil -100 b.p. 11.2512 Bank of Canada s.q. 0.5026 Bank of Japan s.q. -0.1027 European Central Bank s.q. 0.0027 Bank of Sweden s.q. -0.50

2 Reserve Bank of Australia s.q. 1.503 Federal Reserve s.q. 1.004 Bank of Norway s.q. 0.50

10 Reserve Bank of New Zealand s.q. 1.7511 Bank of England s.q. 0.2518 Bank of Mexico +25 b.p. 6.7524 Bank of Korea s.q. 1.2524 Bank of Canada s.q. 0.5031 Bank of Brazil -100 b.p. 10.25

6 Reserve Bank of Australia s.q. 1.508 European Central Bank s.q. 0.00

14 Federal Reserve +25 b.p. 1.2515 Bank of England s.q. 0.2515 Bank of Japan s.q. -0.1015 Swiss National Bank s.q. -0.7521 Reserve Bank of New Zealand s.q. 1.7522 Bank of Norway s.q. 0.5022 Bank of Mexico +25 b.p. 7.00

January

February

March

April

May

June

Schedule 2017 of Central Bank MeetingsDate Central banks Decision Rate

4 Reserve Bank of Australia s.q. 1.504 Bank of Sweden s.q. -0.50

12 Bank of Korea s.q. 1.2512 Bank of Canada +25 b.p. 0.7519 Bank of Japan s.q. -0.1020 European Central Bank s.q. 0.0026 Federal Reserve s.q. 1.2526 Bank of Brazil -100 b.p. 9.25

1 Reserve Bank of Australia s.q. 1.503 Bank of England s.q. 0.259 Reserve Bank of New Zealand s.q. 1.75

10 Bank of Mexico s.q. 7.0030 Bank of Korea s.q. 1.25

5 Reserve Bank of Australia s.q. 1.506 Bank of Brazil -100 b.p. 8.256 Bank of Canada +25 b.p. 1.007 European Central Bank s.q. 0.007 Bank of Sweden s.q. -0.50

14 Bank of England s.q. 0.2514 Swiss National Bank s.q. -0.7520 Bank of Japan s.q. -0.1020 Federal Reserve s.q. 1.2521 Bank of Norway s.q. 0.5027 Reserve Bank of New Zealand s.q. 1.7528 Bank of Mexico s.q. 7.00

3 Reserve Bank of Australia s.q. 1.5018 Bank of Korea s.q. 1.2525 Bank of Brazil -75 b.p. 7.5025 Bank of Canada s.q. 1.0026 European Central Bank s.q. 0.0026 Bank of Norway s.q. 0.5026 Bank of Sweden s.q. -0.5030 Bank of Japan s.q. -0.10

1 Federal Reserve s.q. 1.252 Bank of England +25 b.p. 0.507 Reserve Bank of Australia s.q. 1.508 Reserve Bank of New Zealand s.q. 1.759 Bank of Mexico s.q. 7.00

29 Bank of Korea +25 b.p. 1.50

5 Reserve Bank of Australia s.q. 1.506 Bank of Canada s.q. 1.006 Bank of Brazil -50 b.p. 7.00

13 Federal Reserve +25 b.p. 1.5014 European Central Bank14 Bank of England14 Bank of Norway14 Bank of Mexico14 Swiss National Bank20 Bank of Sweden20 Bank of Japan

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.