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Federal Reserve Board of Governors

Maturity Extension Program and Reinvestment Policy

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Federal Reserve Board of Governors

Frequently Asked Questions 

What is the Federal Reserve's maturity extension program? 

Under the maturity extension program, the Federal Reserve is selling or redeeming shorter-term Treasury securities and using the proceeds to buy longer-term Treasury securities. This will extend the average maturity of the securities in the Federal Reserve's portfolio. In September 2011 the Federal Open Market Committee (FOMC) announced a $400 billion program that will be completed by the end of June 2012. In June 2012, the FOMC continued the program through the end of 2012, which will result in the purchase, as well as the sale and redemption, of an additional $267 billion in Treasury securities.

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What is the purpose of lengthening the average maturity of the Federal Reserve’s securities portfolio?

By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities. The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional support for the economic recovery.

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Will this policy only affect rates on longer-term Treasury securities, or will it also affect the rates paid by households and businesses?

The program should put downward pressure on Treasury rates. In response to the lower Treasury yields, interest rates on a range of instruments including home mortgages, corporate bonds, and loans to households and businesses will also likely be lower. Various studies suggest that the maturity extension program will contribute to a modest decline in longer-term yields relative to levels that would otherwise prevail.

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How is the program expected to affect short-term Treasury rates?

Federal Reserve sales of short-term securities could put some upward pressure on their yields, but the effect is likely to be small. The Committee has stated that it anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. This expectation should help anchor short-term rates near current levels, suggesting that shorter-term Treasury rates should not be significantly affected by the maturity extension program.

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What is the expected economic effect of lengthening the maturity of the Federal Reserve's portfolio?

The maturity extension program will provide additional stimulus to support the economic recovery but the effect is difficult to estimate precisely. The program is intended contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery. The FOMC will be reviewing the pace of its securities transactions and the overall size of the program regularly in light of incoming economic information.

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After the program is complete, what will be the average maturity of the Federal Reserve’s securities portfolio?

The average maturity of the Federal Reserve's Treasury securities portfolio rose from about 75 months at the end of September 2011 to about 100 months by June 2012. Assuming the entire $267 billion extension program is completed, the average maturity will move up to about 120 months by the end of 2012. The maturity distribution of the Fed's holdings of securities is reported weekly on Table 2 of the H.4.1 report.

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Will lengthening the maturity of the portfolio complicate the Federal Reserve's eventual exit from its accommodative strategy?

The Federal Reserve does not anticipate that the maturity extension program will complicate its exit strategy. As noted in the minutes of the June 2011 FOMC meeting, the Committee can use a number of tools including redemptions, changes in the interest paid on excess reserves, reserve draining tools, and asset sales to remove policy accommodation at the appropriate time and normalize the size and composition of the balance sheet.

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Operationally, how will the sale of short-term securities and purchases of long-term securities be coordinated?

See Federal Reserve Bank of New York operating statement Leaving the Board.

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Last update: August 2, 2013