An Answer from the Fed

  I asked the Federal Reserve a question last year regarding a provision in their charter that details the maturities of debt that they can hold on their books:

   “May I get a clarification on the reason that section 14 of the Federal Reserve Act restricts trading securities that have a maturity of six months or less?  1.To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners” Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months… ”

  It took a while to get their reply, I guess they were busy manning the printing presses full steam:

 From:
“FRB.Mail@frb.gov” <FRB.Mail@frb.gov

Your question concerns section 14(b) of the Federal Reserve Act.  The six month maturity limitation you refer to applies only to bonds issued under the provisions of section 4(c) of the Home Owners’ Loan Act of 1933 and not to open market operations involving bonds and notes of the United States.  This distinction is made clear in the last sentence of section 14(b)(1) which reads as follows: “Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market.” 
The reference to obligations issued under the provisions of section 4(c) of the Home Owners’ Loan Act was added to the Federal Reserve Act in April 1934.  The six month maturity date appears to have been placed there to make such bonds similar to the bonds of the Federal Farm Mortgage Corporation, which had been given a six month maturity date limitation for purposes of section 14(b) in January 1934.  The reference to the obligations of the Federal Farm Mortgage Corporation was deleted from section 14(b) in 1961.

  So there you have it. A little confusing due to the outdated program references, but there are no restrictions on the maturities of securities that can be held by the Fed, so long as it is an Open Market Operation.

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