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 • [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 © 2018, Desjardins Group. All rights reserved. ACCORDING TO THE FED f The Committee decided to raise the target range for the federal funds rate to 1.50% 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 21 ST , 2018 #1 BEST OVERALL FORECASTER - CANADA