Back in April, the Federal Reserve released the methodology for its stress-testing of the major US financial institutions. The Fedâs models included a âbaselineâ scenario for economic conditions in the US and a âstressedâ scenario: The baseline assessment averages the projections published by Consensus Forecasts, the Blue Chip survey, and the Survey of Professional Forecasters. It assumes a 2.0% GDP decline in 2009 and a 2.1% GDP gain in 2010, unemployment reaching 8.4% in 2009 and 8.8% in 2010, and house prices falling 14% in 2009 and 4% in 2010. Supervisors also compiled a more âsevere but plausibleâ scenario, which assumes a 3.3% GDP decline in 2009 and 0.5% GDP gain in 2010, unemployment at 8.9% in 2009 and 10.3% in 2010 and house prices down 22% in 2009 and 7% in 2010. And as Bank of America Merill Lynch analyst Hans Mikkelsen noted on Wednesday, reality is fast catching up with even the more adverse scenario (emphasis FT Alphavilleâs): The Congressional Budget Office (CBO) and the White House (Office of Management and Budget) issued updated budgets with large deficits for the coming years. In terms of underlying economic assumptions both now expect unemployment rates consistent with the more adverse stress scenario of 8.9% in 2009 and 10.3% in 2010 used in the Fedâs bank stress tests concluded as recently as early May. For example CBO assumes 9.3% and 10.2%, respectively. Projected GDP growth rates are in-between the baseline and adverse scenarios of the stress tests. While not surprising since the unemployment rate is now widely expected to peak in the 10% range, this nevertheless highlights the remarkable speed of reality catching up with the Fedâs more adverse stress scenario of just a few months ago. The table below illustrates this point even more starkly: Back to the drawing board, Mr Bernanke.