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National   /   February 19, 2021

Paul Bubny
By: Paul Bubny

Fed’s Latest Stress Tests Reflect “Economic Volatility”

The Federal Reserve’s latest stress tests for large financial institutions reflects the instability brought on by the ongoing public health crisis, writes Trepp managing director Matt Anderson. “The new scenarios for 2021 bear marked differences from last year’s scenarios, reflecting the economic volatility triggered by the pandemic and its impacts on the economy and financial markets,” he writes.

He continues, “Despite the differences from previous years’ regulator scenarios for stress testing, the new scenarios do resemble prior years’ scenarios more than the Mid-Year Scenarios that the Fed published in September 2020.”

Even in the relatively stable Baseline scenario, the Fed has made adjustments. The baseline scenario, writes Anderson, represents somewhat of a return to normal (compared to the actual volatility in 2020), but reflects the impacts of the pandemic – higher unemployment, stronger economic growth out of the early 2020 pandemic trough, and lower interest rates.

The economic drivers – GDP growth and unemployment – both are influenced by the current state of the economy and the impacts of the pandemic in the latest stress-test scenarios. Anderson notes that GDP growth is stronger in both the Baseline and Severely Adverse scenarios, as the economy is currently emerging from a severe contraction in the first half of 2020.

Further, “the unemployment rate is higher in both scenarios, as the starting point for this year’s scenarios is a significantly higher unemployment rate than at the outset of last year’s scenarios.

The two scenarios’ interest rate assumptions also show the impacts of the current environment. Short-term rates in the Baseline scenario are lower than in the 2020 Baseline and long-term interest rates are lower in both the Baseline and Severely Adverse scenarios, “mirroring the low rates that have prevailed through most of 2020 and a muted inflation outlook,” writes Anderson.

“Asset prices have shifted relative to last year’s scenarios,” Anderson writes. “Residential home prices are stronger, following the strength of the for-sale residential market through the pandemic. Stock prices and commercial real estate prices are weaker – compared to the 2020 scenarios - with either weaker positive growth (in the Baseline) or larger declines (in the Severely Adverse scenario).”

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Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism.
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