Fed Board, Report: 2023 Stress Test Scenarios – February 2023
Baseline Scenario
“The baseline scenario for the United States features an initial slowdown and then a gradual recovery. The unemployment rate rises steadily from just over 3½ percent at the end of 2022 to near 5 percent by the first quarter of 2024, before declining to just over 4½ percent by the end of the scenario. Real GDP growth declines from about 1¾ percent at the end of 2022 to around negative ¾ percent by the middle of 2023 before gradually increasing to about 2¼ percent by the second half of 2024 and then settling near 2 percent at the end of the scenario. Inflation, measured as the quarterly change in the CPI and reported as an annualized rate, declines from a little less than 3¼ percent to a trough of about 2 percent in the second quarter of 2024 and remains near 2¼ percent in the rest of the scenario. The 3-month Treasury rate increases from around 4 percent at the end of 2022 to about 4¾ percent in the second quarter of 2023, then declines to about 3 percent by the end of the scenario. Ten-year Treasury yields decline steadily from a bit below 4 percent to around 3¼ percent at the end of the scenario. The prime rate follows a path similar to short-term interest rates, while yields on BBB-rated corporate bonds and mortgage rates follow a path similar to long-term interest rates.”
“Equity prices remain at their level for the fourth quarter of 2022 throughout the scenario. Equity market volatility, as measured by the U.S. Market Volatility Index (VIX), falls modestly in the first three quarters of the scenario before increasing to around 28½, where it stays for the remainder of the scenario. Nominal house prices increase gradually by 2 percent per year and commercial real estate prices increase by 3 percent per year over the scenario.”
Severely Adverse Scenario
“Short-term interest rates, as measured by the 3-month Treasury rate, fall significantly to near zero by the third quarter of 2023 and remain there for the remainder of the scenario. Long-term interest rates, as measured by the 10-year Treasury yield, fall by nearly 3¼ percentage points by the second quarter of 2023, and then gradually rise in late 2023 to about 1½ percent by the end of the scenario. These interest rate paths imply that the yield curve remains inverted through the second quarter of 2023. Thereafter, the slope of the yield curve becomes positive and steepens over the remainder of the scenario.”
“Conditions in corporate bond markets deteriorate markedly. The spread between yields on BBB ratedbonds and yields on 10-year Treasury securities widens to 5¾ percentage points by the third quarter of 2023, an increase of more than 3½ percentage points relative to the fourth quarter of 2022. Corporate bond spreads then gradually decline to 2¼ percentage points by the end of the scenario. The spread between mortgage rates and 10-year Treasury yields widens to 3 percentage points by the third quarter of 2023 before narrowing to about 1½ percentage points at the end of the scenario.”
“Asset prices drop sharply in the severely adverse scenario. Equity prices fall 45 percent from the fourth quarter of 2022 through the fourth quarter of 2023, and do not return to their initial level until the end of the scenario. The maximum quarterly value of the VIX reaches a peak value of 75 in the second quarter of 2023, then declines to about 32½ at the end of the scenario. House prices and commercial real estate prices also experience large declines. House prices fall sharply through the third quarter of 2024, reaching a trough that is about 38 percent below their level in the fourth quarter of 2022. Commercial real estate prices experience a slightly larger decline, reaching a trough in the fourth quarter of 2024 that is 40 percent below their level at the end of 2022. House prices and commercial real estate prices recover slowly and are well below their fourth quarter of 2022 values at the end of the scenario.”