Fed variables are not contemporaneous and so do not represent market states.

Is Fed's Severely Adverse Scenario internally consistent?

Be careful when working with Fed variables. Remember that different variables represent different things. Some are quarterly averages, some are extreme data points, while others are quarter-end points.

Specifically, stock market volatility is represented by the highest closing price of VIX Index in a given quarter, but the stock market itself is represented by the closing price of Dow Jones Total Market Index on the last day of the quarter.

Therefore, the story conveyed by the Fed variables might be clouded by potentially material differences in values due to misalighnment in time. Consider, for example, the 1st quarter of 2020, the "Covid" quarter. Arguably, the worst day of the quarter was March 16, 2020. On that day, VIX Index closed at 82.69. The Dow Jones Index was at 23,921. By the quarter end, VIX dropped into mid-50s, while the Dow Jones Index recovered more than 2,000 points, ending the quarter at 25,985. The 2020Q1 record in the Fed historical data table displays side by side the extreme value of VIX and the recovered value of the Dow Jones Index.

A similar picture can be observed in 2018Q1. The Fed Historical Data Table tells us that the stock market was flat but the Volatility index has almost tripled. That, again, is due to pairing Dow Jones value at the quarter end with the VIX levels reached during the turbulent period in the middle of the quarter. The month of February, 2018, was wild. Dow Jones Industrial Index plunged 1,000 points twice. On these days, VIX has spiked. However, by the end of March the market recovered. As a result, Dow Jones shows little change for the quarter while the VIX is sharply higher.

Dow Jones and VIX are negatively correlated. When the stock prices plunge, the Volatility Index jumps. Since 2000, the two worst quarters for the market were 2008Q4, the Credit Crisis, with Dow Jones log return of -27%, and 2020Q1, the Covid, with a -24% return. According to the Fed Historical Data Table, the Volatility Index in these two quarters has log returns of +55% and +139% correspondingly.

The 2021 Fed Domestic Severely Adverse Scenario has much worse -53% log return for the Dow Jones in 2021Q1. The corresponding log return of VIX is +55%, which appears to be insufficiently large.

For 2021Q2, Dow Jones log return is -19% and VIX log return is -6%. That is counterintuitive. The -19% stock market return is large enough to anticipate a positive return for the VIX.