The global economy is posting a strong performance with growth tracking at its fastest pace since Q2 2014. Global growth is tracking at 4.3% in Q2 2017 and the strong pace of growth has been broad-based across both developed markets (DM) and emerging markets (EM). For the countries that have reported Q2 2017 GDP data, EM economies on aggregate are experiencing the fourth quarter of acceleration in growth, while aggregate growth for the 10 DM economies that have reported data held steady at 2%, about 40bps stronger than the preceding five-year average pace of growth.The strength in the global recovery has extended into Q3 as well. Manufacturing PMI data, which is a timely coincident indicator for global growth, has pointed towards continued expansion. Of the 23 countries we track and have reported August PMI data, the global aggregate PMI is at 54.2 in August, the highest level in the five years that we have the data for. Within this group, 20 have PMI reading of above 50, indicating expansion, and 18 have a higher PMI reading in August as compared to July.The recovery in both DMs and EMs is well-founded. DMs are now out of the deleveraging phase, and risk attitudes of the private sector are normalising. Meanwhile, EMs are recovering having made the necessary adjustments to restore macro stability. Moreover, there has been a virtuous feedback loop in that robust DM domestic demand has fed through to stronger EM exports, supporting the recovery there.Taken together, the global economy looks to be on track to register the strongest rate of growth since 2011 this year. Since the recovery in 2011 was driven by aggressive stimulus and reflected a recovery from a deep recession , the current global growth is actually tracking at the best since the 2003-06 cycle.Indeed, notwithstanding some moderation in growth that we expect in the second half of 2017, we estimate full-year global GDP growth of 3.6%, which will also mark a return of above-trend global growth.Typically, business cycles end as central banks tighten to respond to the buildup of price or financial stability risks. The pace of monetary tightening is intrinsically linked to how central banks assess the risks to price and financial stability. With DMs and in particular the US being the most advanced in its cycle, the Fed is at the forefront of the monetary tightening debate.Core inflation has been weak in the US recently and we think that price stability risks are unlikely to emerge in a quick fashion. Indeed, in the last two business cycles in the US (which span a 20-year period), core inflation has not accelerated meaningfully above the 2% mark even while unemployment dipped below the so-called non-accelerating inflation rate of unemployment (Nairu). Certainly, globalisation has played a role in keeping price pressures contained, and recent technological disruption has additionally weighed on inflation.In this context, we think the Fed will be increasingly watching the risks to financial stability. Moreover, the experience of the pre-crisis period — when price stability risks were contained but financial stability risks were building up and irrational exuberance was taking hold — has increased the Fed’s focus on financial stability risks in this cycle.Indeed, chair Yellen had mentioned in her recent Jackson Hole speech that “I expect that the evolution of the financial system in response to global economic forces, technology, and, yes, regulation will result sooner or later in the all-too-familiar risks of excessive optimism, leverage, and maturity transformation reemerging in new ways that require policy responses.”How will central banks assess financial stability risks? Fed Vice-Chair Fischer had earlier laid out the framework according to which the Fed assesses financial stability conditions, highlighting four factors: (1) financial sector leverage, (2) non-financial sector borrowing, (3) liquidity and maturity transformation and (4) asset valuation pressures.Based on recent speeches, the broad message from the Fed is that the financial system is significantly more robust now. Hence concerns about system-wide financial stability risks seem limited at this point. That said, the Fed has also acknowledged that parts of the financial system are still somewhat less transparent and not as well understood, which adds uncertainty.The natural question that follows is how the Fed would respond to the buildup of financial stability risks. The Fed has, on previous occasions, pointed towards macro-prudential measures as the first line of defence to address pockets of risks in selected sectors. However, Chair Yellen in a 2014 speech highlighted that “it may be appropriate to adjust monetary policy to "get in the cracks" that persist in the macroprudential framework”.To be sure, the Fed has to navigate a difficult path of ensuring that the economy is back on a sustainable growth path and fully leaving behind the effects of the deleveraging phase while at the same time assessing and tempering a more-broad based increase in leverage.All things considered, our assessment is that financial stability risks appear limited, though there are some pockets of corporate credit and subprime loans in the consumer space which bear watching. We expect the Fed to continue to gradually lift real interest rates over the forecast horizon, leaning against easy financial conditions, particularly as unemployment rates are already low.However, in the near term, the pace of Fed tightening is less likely to derail the recovery in the US. The key risk to watch out for would be if the US takes up financial deregulation in away that could accelerate the pace of increase in leverage, increasing the risks of a boom-bust scenario.