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Moody’s Analytics, a leading independent provider of economic forecasting and stress testing solutions, has analyzed the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) scenarios for 2014 and has developed detailed economic scenarios for more than 50 countries including the U.S. and its states and metropolitan areas. Moody’s Analytics senior economists also considered possible narratives driving the CCAR scenarios, their likelihood of occurring and the severity of the scenarios.
2014 Adverse Scenario Driven By a Surge in Long-Term Treasury Rates (Graphic: Business Wire)
Among the scenarios to be considered by financial institutions, the one labeled “Severely Adverse” envisions conditions similar to those of the Great Recession, with unemployment rising to a post-World War II high. The hypothetical downturn is driven by sharp declines in Europe and in emerging markets, as well as a new U.S. housing crash. The “Adverse” scenario assumes that global bond investors lose faith in the Federal Reserve’s efforts to normalize monetary policy, causing long-term interest rates to rise sharply. These higher rates derail recoveries in the housing and commercial property markets, resulting in a new recession.
“The CCAR’s adverse scenario realistically represents market concerns that long-term interest rates will surge and short-circuit the economic recovery as the Federal Reserve winds down its bond-buying program and normalizes short-term interest rates,” said Mark Zandi, Chief Economist of Moody’s Analytics.
Expanding beyond the 26 variables provided by the Federal Reserve, projections are available for more than 1,800 variables at the national and regional level, including unemployment insurance claims, consumer credit debt outstanding, auto sales volumes, oil prices, used car prices, ABA/MBA delinquency rates and personal savings rates. The projections include forecasts for the Case-Shiller Home Price Indexes as well as for U.S. consumer credit conditions as detailed by CreditForecast.com.