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• At its September meeting, the FOMC announced a Maturity Extension Program, selling $400bn of Treasuries with maturities below 3 years, and reinvest the proceeds in maturities of 6-30 years over the next nine months.
• Principal payments from holdings of agency debt and agency MBS will no longer be reinvested in Treasuries, but rather in Agencies through purchases in the secondary market.• The impact of the program on 10y Treasury yields will likely be comparable to QE2, in the range of 15-20 bps. The cumulative effects would correspond to a fed funds rate target cut of roughly 45-60 basis points, with the potential to offer a boost of about 0.3% to headline growth over the next year.
• Should the economy and financial market conditions weaken further, renewed asset purchases of long-term Treasuries, as well as agency mortgage securities, seem to be the likeliest outcome for the Fed in order to boost the sluggish recovery.