![]() “If one wondered how the Fed responded in near real time during the Great Financial Crisis or during our more recent Pandemic Era Crisis with very innovative policy responses, it’s due to the systematic work on crisis response around a wide variety of scenarios and simulations conducted by the central bank,” said Joe Brusuelas, chief economist at RSM. But they’re immensely important in guiding Fed decisions. Even when they’re released, certain parts of the discussion are blacked out. The data and conversations about it are considered classified information and are kept private for five years. Policymakers rarely discuss this exercise. But every six weeks, the central bank also secretly stress tests its own policy decisions - assessing how interest rate hikes would stand up against a bevy of economic, geopolitical and other exogenous situations (think: global pandemic). What’s happening: Every year, the Fed performs stress tests to examine whether the nation’s biggest banks can withstand a severe economic crisis. What would happen to the economy in an oil crisis, if US-China tensions accelerate or if there’s another pandemic that shuts down the economy? Federal Reserve officials might know, or at least they think they do. It’s very helpful because you can’t get too focused on the modal paths in a world where it’s very hard to predict the economy,” he said. “All the participants read those and think about them and talk about them. But when pushed, he opened up about a top-secret Fed tool: the Teal Book.Īt every Fed policy meeting, he said, “our staff works up six or seven or eight alternative simulations,” he said. “We use our tools to achieve our legal mandates,” he said. ![]() When asked how the Fed plans for the worst case scenarios on the geopolitical front, he first responded in Fedspeak. Powell didn’t just ditch his tie, he also ditched his script. The Fed head shed his reading glasses and wore his shirt collar open with no tie as he cracked jokes alongside a panel of his central banking contemporaries. Federal Reserve Chair Jerome Powell seemed uncharacteristically relaxed yesterday at the European Central Bank conference in Portugal.
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