EFTA01459053.pdf

Although inflation is well below the Fed's objective, it is expected to rise ahead • Inflation still well below 2% target: headline inflation Inflation is expected to rebound from current low levels and near 0%; core inflation 40-70bp below target approach the Fed's target' • Weakness due primarily to forces Fed describes as Fed's target' temporary (e.g., USD surge, oil price drop) "*.grile or an as = msurr ea • Inflation outlook is more important than current data "" 1.0 I •• - Monetary policy acts with a lag: Fed thinks it 0.5 Headline CPI inflation S —Core CPI inflation takes 12-18 months for policy to have full effect 0.0 - Fed must be reasonably confident inflation will -0.5 return to target to hike — but doesn't need to wait 2013 2014 2015 2016 2017 Note ('): The Fod officially targets 2% for headline PCE inflation. This is roughly equivalent to 2.3% for for inflation to rise headline CPI inflation, green that CPI inflation lends to run a law tenths about PCE. Source: BLS. Haver Analftics. Deutsche Bank Research • Key inputs into this assessment include - Outlook for growth / labour market (positive) well-anchored survey measures of inflation expectations more - Inflation expectations (positive) important to Fed than sharp drop in market measures - Import price inflation / dollar (negative) 2012-12-31 = 100 Well-anchored survey based expectations... • Core inflation unlikely to rise significantly next year 100 Survey of Professional Forecasters - Strong dollar should continue to weigh on 90 U Michigan. (consumer) inflation next year 80 - Falling commodity prices may be more persistent than Fed believes 70 ...contrasts with drop in Market 5y5y market-implied inflation • But we and the Fed see inflation nearing 2% target 60 expectations breakeven over next 2 years, as temporary factors dissipate 2012 2013 2014 Sourco: U Mich, FRB Phi SPF. HEW Of Anatylics. Deutsche Bank Research and labour market continues to tighten 18 ft sacrt:t Bark slittn="Ihatirrigitie"a'" 'ma CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119265 CONFIDENTIAL SDNY_GM_00265449 EFTA01459053