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 20 16 12 8 4 0 1960 1970 1980 1990 —Distance from targets' —Distance from "normal policy" 2000 2010 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 The key considerations for the first hike have been met Employment Deutsche Bank Research Unemployment Job creation Core inflation (PCE) Inflation Wage inflation •••• Other Inflation expectations Financial conditions Sel • At NAIRU, broader slack measures also diminished • Remains robust • Stable at just 1.3% yoy but expected to rise • Trending higher, but still low • Survey: mixed recently • Market: low but have risen • Market hike odds have risen • Financial conditions have eased a bit • Fed has made considerable progress on its dual mandate - Headline inflation is low due to transitory factors and core inflation is firmer - Labour market is at full employment • Yet, Fed policy has remained stuck at 'crisis levels - Fed funds rate still near zero - Fed's balance sheet expanded to -$4.5tn, more than five times its pre-crisis level • As a result, current monetary policy is the furthest from normalised policy on record • The Fed has explained this divergence from normal policy in a number of ways - Other measures of labour market slack are elevated (e.g., high part-time employment) - Headwinds have significantly reduced the neutral fed funds rate since the financial crisis - Greater risk is hiking too early at 0% rates • While these considerations continue to support gradual rate hikes, they no longer justify near-zero rates 16 CONFIDENTIAL - PURSUANT TO FED. R. GRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0119263 SDNY_GM_00265447 EFTA014590