EFTA01459043.pdf

We disagree with the view that hiking is a policy mistake: the economy is strong enough to withstand higher rates Fed does not want to hike too early and risk having to reverse Vve disagree with inany arguments against hiking rates and course as other major central banks have done gradual hikes in any case reduce the chance of a policy error %, policy rate —ECB —Riksbank Norges Bank —RBA Argument Argument for Our view 8 strength policy mistake 6 4 2 • Fed lacks the loots to ease policy • Valid point for raising rates gradually 0 Financial • Last months' tightening equal 1-2 hikes conditions have -2 Tightening is precisely Fed's intention already tightened • 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: EC8. SRB. NB. RBA. Have/ lthalylks, Deutsche Bank Research No inflation • Temporary factors keeping inflation low pressures • Should rise toward target as they abate Rising real wages incentivise firms to invest, leading to higher productivity growth; we should see this in the coming years • Global growth is slow — but expect %yoy Productivity growth (3y moving avg, Is) %yoy Global growth is moderate pick up in next two years 5 Real wage growth (2y ead, rs) 3.0 O too weak • Exports only 1/8th of GDP 4 2.5 • 2.0 3 1.5 • Private domestic demand* growing at Economy is too 2 1.0 same pace as pre-crisis weak for hikes 0.5 • Robust employment growth continues 0.0 -r -0.5 • Low productivity growth means a faster 1985 1990 1995 2000 2005 2010 2015 Productivity Notes: productivity grcreth is real output pet how in the non-farm business sector; real wage groMh is tightening of the labour market growth is low employment cost index compensation mums core PCE inflation • Should rise modestly as wages pick up Source: BLS. BEA, Haver Analytics, Deutsche Bank Research °Weak eStrong Deutsche Bank P a r 5 Research ;3Peckra -?"; r;n-ember :Vt) Note: (*) The sum of personal consumption, residential investment and non-residential fixed investment. CONFIDENTIAL — PURSUANT TO FED. R. GRIM. P. 6(e) DB-SDNY-0119252 CONFIDENTIAL SDNY_GM_00265436 EFTA01459043