The unfolding market shock and economic crisis wrought by the coronavirus disrup...
WASHINGTON - The unfolding market shock and economic crisis wrought by the coronavirus disruption is shaping up to be a nightmare for the Federal Reserve – literally.
Of the 16 dire domestic indicators the Fed dreamt up for this year’s test, including plunging stock markets, record low Treasury yields, slumping economic growth and mass unemployment, five have been breached while others are skirting close. “They need to understand where the banks are heading into this,” said Tim Clark, a former senior Fed official who helped build the stress tests after the last crisis.
A central plank of the Fed’s post-crisis safety and soundness regime, the tests dictate how much capital and liquidity a bank needs to go about its daily business in the eye of a storm. As the country’s economic expansion continued over the past decade, the tests have gotten progressively harsher. But for the first time, reality may be worse than fantasy.In this year’s tests for example, the stock market would shed more than 25% of its value, the U.S.
That’s not all. The yield on 10-year Treasury notes, a key safe-haven asset, has fallen twice as hard as the Fed envisioned, hitting a record low of 0.39% this month. It now overs around 0.8%, slightly above the 0.7% Fed’s floor.
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