2013-38 | December 2013
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A Probability-Based Stress Test of Federal Reserve Assets and Income
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.
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Christensen, Jens H.E, Jose A. Lopez, and Glenn D. Rudebusch. 2013. "A Probability-Based Stress Test of Federal Reserve Assets and Income ," Federal Reserve Bank of San Francisco Working Paper 2013-38. Available at https://doi.org/10.24148/wp2013-38