Outright Purchases and Sales
The Federal Reserve tends to conduct far more
outright purchases than outright sales or redemptions of securities primarily
because it must offset the drain of balances resulting from the public’s
increasing demand for Federal Reserve notes. When the Desk decides
to buy securities in an outright operation, it first determines how much it
wants to buy to address the mismatch between supply and demand. It then divides
that amount into smaller portions and makes a series of purchases in different
segments of the maturity spectrum, rather than buying securities across all
maturities at once, in order to minimize the impact on market prices.
When the projections indicate a need to drain
Federal Reserve balances, the Desk may choose to sell securities or to redeem
maturing securities. Sales of securities are extremely rare. By redeeming some
maturing securities, rather than exchanging all of them for new issues, the
Federal Reserve can reduce the size of its holdings gradually without having to
enter the market. Redemptions drain Federal Reserve balances when the Treasury
takes funds out of its accounts at depository institutions, transfers those
funds to its account at the Federal Reserve, and then pays the Federal Reserve
for the maturing issues.