Fed set to adopt final amendments to policy statement on stress-test scenario design framework

A change in the unemployment rate of less than 4% in the severely adverse stress-test scenario may be adopted by the Federal Reserve under certain economic conditions, under a final rule scheduled to be published Thursday.

The final rule also institutes a guide limiting “procyclicality” in the stress test for the change in the house price index in the severely adverse scenario.

The final rule will take effect 30 days after publication in the Federal Register.

In December 2017, the Fed proposed to modify its framework for the design of the annual hypothetical economic scenarios used in the stress tests. The changes, the Fed said, aimed to enhance transparency and to further promote the resilience of the banking system throughout the economic cycle.

In particular, the proposed revisions included more information on the hypothetical path of house prices as well as notice that the Fed is exploring the addition of variables to test for funding risks in the hypothetical scenarios. The unemployment rate change is one of those variables.

Amendments to Policy Statement on the Scenario Design Framework for Stress Testing