hy > offing. Interest rates have increased from ro a low of 1.3% for the 10-year Treasury in July 2016 to 2.4% by year-end. While : this increase in interest rates would : & pees | ordinarily tighten financial conditions, = == it has been partially offset by stronger y Fe a bs a equity markets and tighter corporate oe Be —— 4 8 f G bond spreads. In fact, financial conditions - im | —— were looser at the end of the year than E | oo | } ; : they were at the beginning of 2016 fe | despite expectations of a slow but steady = Pe f J increase in the federal funds rate. ST ! a sed We share the market view that the a EE pace of monetary policy tightening will We do not believe this tightening cycle will lead to a US recession in 2017. accelerate but remain benign. As shown in Exhibit 23, the difference between could derail the last innings of this recovery and the Federal Reserve dots, the view implied by the bull market. The first three are low-probability bond market, the forecast by our colleagues in risks in our view, the next three risks have a GIR and our view is negligible. The bond market high probability of occurring but their impact is has priced two hikes, the Federal Reserve and GIR uncertain and the last two are high-probability and expect three hikes, and we think two or three hikes high-impact risks beginning as early as 2017. are equally likely in 2017. We assume that the Federal Reserve will slow down the pace of interest Low-Probability but High-Impact Risks: ¢ The pace of Federal Reserve tightening is disruptive and financial markets react negatively. oe ¢ The economy slips into recession. ua’ ¢ Populist parties in the Eurozone bg gain greater influence. ga High-Probability but Uncertain-Impact Risks: * Geopolitical hot spots get hotter. Je ¢ Terrorism escalates. i ie ¢ Cyberattacks continue. (i High-Probability and High-Impact Risks: ¢ China submerges under its debt burden and ees: capital outflows. { ¢ US-China relations deteriorate under the Trump admi