A probability-based stress test of Federal Reserve assets and income

To support the economic recovery, 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 and mortgage-backed securities holdings and declines in the Fed׳s remittances to the Treasury. In assessing this interest rate risk, we use probabilities of alternative interest rate scenarios that are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress tests indicate that large portfolio losses or a cessation of remittances to the Treasury are unlikely to occur over the next few years. •The Federal Reserve׳s expanded balance sheet has greater interest rate risk.•We assess this risk with a probability-based stress test using a yield curve model.•The model generates probabilities of multi-year alternative interest rate scenarios.•We find a low probability that the Fed׳s securities portfolio will be underwater.•We find a low probability that the Fed׳s remittances to the Treasury will stop.