ESSENTIALS OF THE MONETARY POLICY

François Dupuis, Vice-President and Chief Economist Mathieu D’Anjou, Senior Economist • Francis Généreux, Senior Economist • Jimmy Jean, 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 1.00% to 1.25%.

f The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.

f The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated.

f Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand.

f On a 12‑month basis, overall inflation and the measure excluding food and energy prices have declined 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 Risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

COMMENTS

After the third consecutive quartely rate increase in June, it was clear that the Fed would not be announcing any changes to its monetary policy during July’s meeting. The meeting to be held on September 19 and 20, during which the Fed’s leaders will present their new forecasts and Fed Chair Janet Yellen will hold a press conference, will be far more important with respect to what comes next.

The main point of interest in today’s statement is to see if Fed leaders wanted to send a signal on the likelihood of additional firming of monetary policy in September. This could be in the form of a fourth consecutive quarterly key rate increase or the start of normalizing its balance sheet. The latter seems fairly likely, as the statement was changed to note that the normalization program could start relatively soon.

Some believed that the Fed would take advantage of today’s statement to signal a growing concern regarding inflation. In the end, it only noted the recent decrease in inflation and kept its comments on the U.S. economy fairly positive, despite some disappointing data published recently. With financial conditions still very accommodative, due in part to a decline in the value of the U.S. dollar, weak inflation should not be enough for the Fed to deviate from its plan to gradually firm its monetary policy.

IMPLICATIONS

It comes as no surprise that the Fed’s statement contains very little in the way of new information. The minutes of today’s meeting, to be released on August 16, and speeches by Fed’s leaders as September’s meeting approaches, could provide a little more indications on what comes next. For now, our scenario, which calls for an announcement of the normalization of the balance sheet in September, and an increase of 0.25% in key rates next December, still holds.

Mathieu D’Anjou, CFA, Senior Economist

Federal Reserve (Fed)One Small Step Closer to the Normalization of the Balance Sheet

ECONOMIC STUDIES | JULY 26, 2017

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ECONOMIC STUDIES

2JULY 26, 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

1 Reserve Bank of Australia3 Bank of England9 Reserve Bank of New Zealand

10 Bank of Mexico30 Bank of Korea

5 Reserve Bank of Australia6 Bank of Brazil6 Bank of Canada7 European Central Bank7 Bank of Sweden

14 Bank of England14 Swiss National Bank20 Bank of Japan20 Federal Reserve21 Bank of Norway27 Reserve Bank of New Zealand28 Bank of Mexico

3 Reserve Bank of Australia18 Bank of Korea25 Bank of Brazil25 Bank of Canada26 European Central Bank26 Bank of Norway26 Bank of Sweden30 Bank of Japan

1 Federal Reserve2 Bank of England7 Reserve Bank of Australia8 Reserve Bank of New Zealand9 Bank of Mexico

29 Bank of Korea

5 Reserve Bank of Australia6 Bank of Brazil6 Bank of Canada

13 Federal Reserve14 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.