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 • [email protected] • 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 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 #1 BEST OVERALL FORECASTER - CANADA