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.

 

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