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