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Exhibit 23: Policy Rate Path Projections We expect the pace of monetary policy tightening to accelerate but remain benign. Federal Funds Rate (%) 405 ISG View —_— GIR View Market Implied 234 Median Federal Reserve Projection cd 3.0 o” 255 ° o Ps ¢ o 2.0 - 3.5 5 0.5 0.0 Dec-16 Dec-17 Dec-18 Dec-19 Data as of December 31, 2016. Note: For informational purposes only. There can be no assurance that the forecasts will be achieved. Source: Investment Strategy Group, Bloomberg, Goldman Sachs Global Investment Research, Federal Reserve. rate hikes should the economy weaken, and will pick up the pace later in 2017 or 2018 if the fiscal package under the Trump administration is bigger than we expect (see Section II, 2017 Global Economic Outlook, for a more detailed discussion). Irrespective of the realized pace, this tightening cycle will not result in a US recession in 2017, in our view. Recession Is Highly Unlikely “Depression Bread Line,” Bronze, 1991, George Segal at the Franklin D. Roosevelt Memorial. Art © The George and Helen Segal Foundation/Licensed by VAGA, New York, NY. Outlook | Investment Strategy Group 27 Low Expectations of a US Recession Recessions in the US have been triggered by Federal Reserve tightening of monetary policy; by economic imbalances such as the bursting of the dot-com and housing bubbles in 2000 and 2008, respectively; or by external shocks such as the Arab oil embargo in 1973. The first two triggers are unlikely to occur in 2017, and the third, a shock, is not something that we can typically anticipate. However, we do think that China will be a source of downside risk sometime over the next three years. First, as we mentioned in last year’s Outlook, there have been five tightening cycles in the post- WWII period that have not triggered a recession. Four of those cycles occurred during the three longest recoveries, as shown in Exhibit 24. Those cycles have been characterized by an early start to the tightening cycle, a slow pace relative to historical averages (220 basis points per year for nonrecessionary tightening and 330 basis points per year in recessionary cycles), low core inflation and slack in the labor market. This cycle shares those characteristics: the tightening cycle started in 2015, the pace has been 25 basis points per year, the core personal consumption expenditures (PCE) index— the Federal Reserve’s preferred benchmark for inflation—is at 1.6% year over year as of November 2016, and our colleagues in GIR estimate that the labor market still has about 0.3% slack. Second, the US economy does not suffer from any imbalances in which one sector of the economy has become the sole driver of growth or equity market returns. Before the global financial crisis, residential investment as a percentage of GDP had peaked at 6.7% in 2005, compared to a long-term average of 4.7%, and the credit-to-GDP gap as a measure of nonfinancial sector leverage had peaked at 12.4% in 2007 compared to a long-term average of -1%, leading to meaningful imbalances. Similarly, in 2000, technology and telecommunication sector valuations were more than three standard deviations higher than the average of other sectors. Such imbalances do not exist in the US at this time. Third, while we cannot anticipate an external shock—otherwise it would not be a shock—we do not see imbalances in other large economies except in China. HOUSE_OVERSIGHT_014560