NEW YORK (MNI) – The following text is a statement by the New York
Federal Reserve Wednesday:

What is the Federal Reserve’s maturity extension program?

Under the maturity extension program, the Federal Reserve intends
to sell $400 billion of shorter-term Treasury securities by the end of
June 2012 and use the proceeds to buy longer-term Treasury securities.
This will extend the average maturity of the securities in the Federal
Reserves portfolio.

What is the purpose of lengthening the average maturity of the
Federal Reserves 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 stimulus to
support the economic recovery.

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.

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
will warrant the current level of the federal funds rate at least until
mid-2013. 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.

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 Federal Open Market Committee (FOMC)
will be reviewing the pace of its securities transactions and the
overall size of the program regularly in light of incoming economic
information.

After the $400 billion is complete, what will be the average
maturity of the Federal Reserves securities portfolio?

Assuming the entire $400 billion program is completed, the average
maturity of the Federal Reserve’s Treasury securities portfolio would be
expected to rise from about 75 months currently to about 100 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.

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.

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.

Why did the FOMC choose to shift from reinvesting principal
payments on agency securities in longer-term Treasury securities to
reinvesting those payments instead in agency mortgage-backed securities?

The FOMC believed that this action would help support conditions in
mortgage markets and contribute to a stronger economic recovery. As a
result of this change, the Federal Reserve’s holdings of agency
securities will remain near current levels.

** Market News International New York Newsroom: 212-669-6430 **

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