EFTA01459051.pdf

Despite substantial progress towards its targets since the crisis, Fed policy remains extremely accommodative Policy is its furthest from normal on record even as the Fed nears its targets on unemployment and inflation • Fed has made considerable progress on its dual 20 —Distance from targets' mandate —Distance from "normal policy" 16 - Headline inflation is low due to transitory factors 12 and core inflation is firmer 8 - Labour market is at full employment 4 • Yet, Fed policy has remained stuck at 'crisis levels 0 - Fed funds rate still near zero 1960 1970 1980 1990 2000 2010 - Fed's balance sheet expanded to -$4.5tn, more Note: (*) Our distance measures fdlow a speech by St. Louis Fed President Am Bullard on 17 July 2014 Source: Haver Mat'tics. Deutsche Bank Research than five times its pre-crisis level The key considerations for the first hike have been met • As a result, current monetary policy is the furthest from normalised policy on record • At NAIRU, broader slack Unemployment ✓ measures also diminished • The Fed has explained this divergence from normal Employment policy in a number of ways Job creation ✓ • Remains robust - Other measures of labour market slack are Core inflation • Stable at just 1.3% yoy but elevated (e.g., high part-time employment) (PCE) expected to rise - Headwinds have significantly reduced the Inflation Wage inflation •••• • Trending higher, but still low neutral fed funds rate since the financial crisis - Greater risk is hiking too early at 0% rates Inflation • Survey: mixed recently expectations Sel • Market: low but have risen • While these considerations continue to support • Market hike odds have risen gradual rate hikes, they no longer justify near-zero Financial Other • Financial conditions have rates conditions eased a bit Deutsche Bank 16 Research CONFIDENTIAL - PURSUANT TO FED. R. GRIM. P. 6(e) DB-SDNY-0119263 CONFIDENTIAL SDNY_GM_00265447 EFTA01459051