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 raise the target range for the federal funds rate to 1.50% to 1.75%.

f Information received since the Federal Open Market Committee met in January 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 in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.

f On a 12‑month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2%. Market‑based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer‑term inflation expectations are little changed, on balance.

f The economic outlook has strengthened in recent months.

COMMENTS

New leader, same trend. Now headed by Jerome Powell, President Donald Trump’s choice to succeed Janet Yellen, the Fed raised rates at the meeting that ended today. The increase does not come as a surprise: 92 of 95 respondents in the Bloomberg survey expected rates to go to 1.75%, while the futures market had it 96.2% priced in.

The statement released by the Fed notes the fairly disappointing recent data for the first quarter of 2018. Retail sales and new capital goods orders are two of the indicators pointing to sluggish growth this winter. However, Fed leaders remain optimistic, explicitly signalling that “the economic outlook has strengthened.” They are betting that the U.S. economy will remain lively, as well as, sooner or later, getting stimulus from the

tax cuts and increase in federal spending. The Fed has upgraded its real GDP growth forecast for the end of 2018, from 2.5% to 2.7%. For 2019, it has gone from 2.1% to 2.4%. At the same time, the outlook for the jobless rate has been lowered, from 3.9% to 3.8% for the end of 2018, and from 3.9% to 3.6% for 2019. Inflation forecasts have not changed as much, except for a 0.1% uptick in core inflation for 2019 and 2020.

The solid economic growth and lively job market support ongoing key rate normalization. The Fed is still lined up to raise rates gradually, as it did with the three increases ordered in 2017. The leaders’ median forecast predicts two further 0.25% increases by the end of this year. Note, though, that the median was close to suggesting another one: 7 of 15 participants preferred that option. The forecast for 2019 has been increased to three rate hikes (versus two to three).

IMPLICATIONS

Our scenarios are similar to the Fed’s; we expect two additional rate increases this year, probably in June and September. However, the Fed will be keeping its eye out for faster economic growth and slightly more aggressive inflation, which would open the door for a fourth hike.

Francis Généreux, Senior Economist

Federal Reserve (Fed)Jerome Powell Starts His Mandate with a Rate Hike

ECONOMIC STUDIES | MARCH 21ST, 2018

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ECONOMIC STUDIES

2MARCH 21ST, 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 Bank of Brazil -25 b.p. 6.758 Bank of England s.q. 0.508 Reserve Bank of New Zealand s.q. 1.758 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 Federal Reserve +25 b.p. 1.7521 Bank of Brazil22 Bank of England22 Reserve Bank of New Zealand

3 Reserve Bank of Australia11 Bank of Korea12 Bank of Mexico18 Bank of Canada26 European Central Bank26 Bank of Sweden26 Bank of Japan

1 Reserve Bank of Australia2 Federal Reserve3 Bank of Norway

10 Bank of England10 Reserve Bank of New Zealand16 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 Bank28 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 Australia9 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 Federal Reserve27 Reserve Bank of New Zealand

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 Australia8 Bank of England8 Reserve Bank of New Zealand8 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.