Wednesday, August 26, 2009

Looks like more ponies

Posted by Stacy-Marie Ishmael on Aug 26 16:59.
FT Alphaville

Back in April, the Federal Reserve released the methodology for its stress-testing (scratch that, IQ testing-AM) of the major US financial institutions. The Fed’s models included a “baseline” scenario for economic conditions in the US and a “stressed” scenario:

The baseline assessment averages the projections published by Consensus Forecasts, the Blue Chip survey, and the Survey of Professional Forecasters. It assumes a 2.0% GDP decline in 2009 and a 2.1% GDP gain in 2010, unemployment reaching 8.4% in 2009 and 8.8% in 2010, and house prices falling 14% in 2009 and 4% in 2010.

Supervisors also compiled a more “severe but plausible” scenario, which assumes a 3.3% GDP decline in 2009 and 0.5% GDP gain in 2010, unemployment at 8.9% in 2009 and 10.3% in 2010 and house prices down 22% in 2009 and 7% in 2010.

And as Bank of America Merill Lynch analyst Hans Mikkelsen noted on Wednesday, reality is fast catching up with even the more adverse scenario:

The Congressional Budget Office (CBO) and the White House (Office of Management and Budget) issued updated budgets with large deficits for the coming years.

In terms of underlying economic assumptions both now expect unemployment rates consistent with the more adverse stress scenario of 8.9% in 2009 and 10.3% in 2010 used in the Fed’s bank stress tests concluded as recently as early May.

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