By Yali N’Diaye

WASHINGTON (MNI) – The Federal Reserve waited until the final deadline
Thursday to release its financial and economic scenarios for the upcoming bank
stress tests, with the real U.S. GDP growth seen dropping 6.1% in the first
quarter of 2013 under the worst case scenario, which also has the unemployment
rate peaking at 12.1% in the second quarter of 2014.

The central bank also issued a statement for comment on how it approaches
the design of the scenarios, with comments due by Feb. 15, 2013.

The Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) will
test 19 large institutions under three scenarios using a set of 26 economic and
financial variables, some domestic and some international.

This will help assess the firms “strength and resilience” as well as “their
ability to continue to meet the credit needs of households and businesses in
stressful economic and financial environments.”

The scenarios run through the end of 2015.

Under the base case scenario, real GDP growth in the fourth quarter of 2013
is seen at 2.9%, before peaking at 3.5% in the first quarter of 2015 and
returning to 3.0% in the final quarter of 2015. The unemployment rate is seen at
7.6% in 4Q 2013, 7.2% in 4Q 2014 and 6.7% in 4Q 2015.

The CPI is seen 2.5% in 4Q 2012, 1.8% in 1Q 2013, and evolving between 2.0%
and 2.4% through 4Q 2015. The house price index would continuously rise until
157.1 in 4Q 2015 from 144.3 in 4Q 2012.

The 10-year Treasury yield is seen peaking at 3.9% in 4Q 2015, when the
mortgage rate is seen at its highest over the period at 5.9%.

Among international variables, the euro area real GDP is seen declining
until 1Q 2013, and peaking at 1.6% from 2Q 2015.

The euro-dollar is seen at $1.3 from 4Q 2012 to 2Q 2013 and $1.2 between 3Q
2013 and 4Q 2015.

Under the severely adverse scenario, banks would have to resist as real GDP
decline of 6.1% at the worst in 1Q 2013, that would turn to flat in 1Q 2014 and
not become positive until 2.2% in 2Q 2014.

Meanwhile, the unemployment rate would peak at 12.1% in 2Q 2014, before
returning gradually to 11.1% in 4Q 2015. The house price index would fall to
113.2 at its worst in 1Q 2015 from 141.6 in 4Q 2012.

Among financial variables, the 10-year Treasury yield would remain at 1.2%
until 1Q 2014, before rising until 2.2% at the end of 2015.

Mortgage rates would remain below 5% for the entire period, peaking at 4.8%
in 3Q 2013.

Abroad, the real GDP would fall 8.7% in the euro zone at its worst in 4Q
2012, would drop 6.8% in Japan in 3Q 2013 and 6.6% in the UK in 1Q 2013.

“In the United States, the severely adverse scenario features a severe
recession, with the unemployment rate increasing 4 percentage points from
current levels (an amount similar to that in severe contractions over the past
half-century),” the Fed said. “Notably, the unemployment rate remains above any
level experienced over the last 70 years from the middle of 2013 to the end of
the scenario.”

“In the severely adverse scenario, the U.S. dollar appreciates relative to
the euro and the currencies of developing Asia and depreciates relative to the
yen,” it added.

The Fed also provided details of a less adverse scenario where the U.S.
real GDP would fall 1.7% in 3Q2013 and become positive only in 2Q2014, with the
unemployment rate rising to 10.0% in 3Q2015.

** MNI Washington Bureau: 202-371-2121 **

–email: yndiaye@mni-news.com

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