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 course as other major central banks have done %, policy rate 8 6 4 2 0 —ECB —Riksbank Norges Bank —RBA -2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: EC8. SRB. NB. RBA. Have/ lthalylks, Deutsche Bank Research Rising real wages incentivise firms to invest, leading to higher productivity growth; we should see this in the coming years %yoy 5 4 3 2 Productivity growth (3y moving avg, Is) Real wage growth (2y ead, rs) -r %yoy 3.0 2.5 • 2.0 1.5 1.0 0.5 0.0 -0.5 1985 1990 1995 2000 2005 2010 2015 Notes: productivity grcreth is real output pet how in the non-farm business sector; real wage groMh is employment cost index compensation mums core PCE inflation Source: BLS. BEA, Haver Analytics, Deutsche Bank Research Deutsche Bank P a r Research ;3Peckra -?"; r;n-ember :Vt) Vve disagree with inany arguments against hiking rates and gradual hikes in any case reduce the chance of a policy error Argument Argument for Our view strength policy mistake • O Fed lacks the loots to ease policy • Valid point for raising rates gradually Financial • Last months' tightening equal 1-2 hikes conditions have already tightened • Tightening is precisely Fed's intention No inflation • Temporary factors keeping inflation low pressures • Should rise toward target as they abate Global growth is • Global growth is slow — but expect too weak moderate pick up in next two years • Exports only 1/8th of GDP • Private domestic demand* growing at Economy is too weak for hikes same pace as pre-crisis • Robust employment growth continues Productivity growth is low °Weak eStrong • Low productivity growth means a faster tightening of the labour market • Should rise modestly as wages pick up 5 Note: (*) The sum of personal consumption, residential investment and non-residential fixed investment. CONFIDENTIAL — PURSUANT TO FED. R. GRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0119252 SDNY_GM_00265436 EFTA01459043