Although inflation is well below the Fed's objective, it is expected
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
ftsacrt: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 S Headline CPI 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