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

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ACCORDING TO THE FED

f The Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent.

f Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, 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, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. 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

Expectations for today’s Federal Reserve meeting were small. In September, it had announced that it would start trimming its balance sheet and clearly signalled its plan to go forward with gradual key rate increases. It was thus clear that the Fed would not change its monetary policy in November. In this context, investors turned their attention in the last few weeks to the imminent appointment of the next Fed Chair.

The main interest in today’s statement was whether Fed leaders wanted to send an additional signal on the probability of monetary firming in December. Unsurprisingly, the Fed did not

think it necessary to add a remark that another rate increase would likely be appropriate soon, or in the next few months.

In September, 12 out of the Fed’s 16 leaders thought that another key rate increase would be appropriate by the end of 2017, so the economic situation would have to erode substantially to convince the Fed not to raise its rates in December. In contrast, the many encouraging economic numbers released in the last few weeks, including U.S. real GDP growth of 3.0% in the third quarter, point to a very good situation. Fed leaders seemed to want to confirm that they were happy with the U.S. economy’s performance; they even talked about solid growth, whereas they usually use the term moderate.

IMPLICATIONS

Everything suggests that the U.S. economy’s solid performance supports Fed leaders’ plans to continue with monetary firming as of the December meeting. The market has already largely priced in the hike. However, if the Fed’s tone remains this confident, investors might gradually upgrade their rate hike expectations for next year, which would support a rise in bond yields.

Mathieu D’Anjou, CFA, Senior Economist

Federal Reserve (Fed)Solid Growth Points to a Rate Hike in December

ECONOMIC STUDIES | NOVEMBER 1, 2017

#1 BEST OVERALLFORECASTER - CANADA

ECONOMIC STUDIES

2DATE | 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 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.