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We do not believe this tightening cycle will lead to a US recession in 2017. could derail the last innings of this recovery and bull market. The first three are low-probability risks in our view, the next three risks have a high probability of occurring but their impact is uncertain and the last two are high-probability and high-impact risks beginning as early as 2017. Low-Probability but High-Impact Risks: ¢ The pace of Federal Reserve tightening is disruptive and financial markets react negatively. The economy slips into recession. Populist parties in the Eurozone gain greater influence. High-Probability but Uncertain-Impact Risks: ¢ Geopolitical hot spots get hotter. ¢ Terrorism escalates. ¢ Cyberattacks continue. High-Probability and High-Impact Risks: ¢ China submerges under its debt burden and capital outflows. ¢ US-China relations deteriorate under the Trump administration. Pace of Federal Reserve Tightening Unlike the December 2015 interest rate hike that prompted a vocal response from naysayers but had limited impact on the bond market, the December 2016 hike has elicited a muted response from market commentators but has had a larger impact on the bond market. The underlying strength of the labor market and the steady improvement in the economy have led to a change of sentiment toward more interest rate hikes, which are clearly in the offing. Interest rates have increased from 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 ordinarily tighten financial conditions, it has been partially offset by stronger equity markets and tighter corporate bond spreads. In fact, financial conditions were looser at the end of the year than they were at the beginning of 2016 despite expectations of a slow but steady increase in the federal funds rate. We share the market view that the pace of monetary policy tightening will accelerate but remain benign. As shown in Exhibit 23, the difference between the Federal Reserve dots, the view implied by the bond market, the forecast by our colleagues in GIR and our view is negligible. The bond market has priced two hikes, the Federal Reserve and GIR expect three hikes, and we think two or three hikes are equally likely in 2017. We assume that the Federal Reserve will slow down the pace of interest There is no shortage of concerns as markets climb a wall of worry. 26 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014559