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A Probability-Based Stress Test of Federal Reserve Assets and Income

Author

Listed:
  • Christensen, Jens H. E.

    (Federal Reserve Bank of San Francisco)

  • Lopez, Jose A.

    (Federal Reserve Bank of San Francisco)

  • Rudebusch, Glenn D.

    (Federal Reserve Bank of San Francisco)

Abstract

To support the economy, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed's associated interest rate risk--including potential losses to its Treasury securities holdings and declines in remittances to the Treasury. Unlike past examinations of this interest rate risk, we attach probabilities to alternative interest rate scenarios. These probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress test finds that the Fed's losses are unlikely to be large and remittances are unlikely to exhibit more than a brief cessation.

Suggested Citation

  • Christensen, Jens H. E. & Lopez, Jose A. & Rudebusch, Glenn D., 2013. "A Probability-Based Stress Test of Federal Reserve Assets and Income," Working Papers 14-01, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:14-01
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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