Question

When the Fed lets its assets mature (Ex. when a treasury bond matures), does the Treasury or someone else pay the Fed money?

Answer 1

The bonds expire, and the Treasury purchases new bonds, and collects funds from the Fed's banking system. Then the Fed "de-creates" the capital, if it actually allows to the its balance sheet. The net effect is that capital comes from the financial system, and the debt of Treasury stays the same. Letting mature securities is exactly the same as if the Fed had sold the securities before maturity. It also takes money out of the economy and I might say it could be less manageable because the Fed would not be in charge of the rate that money was being withdrawn from the economy. That would be governed by date of maturity.

The amount paid out is not the same as the profit the Fed receives along the way. Indeed, the interest is free, and returns to the Treasury. But repaid principal does not, because it would simply be helicopter capital, so in this situation, if the Fed will not extend or at least retain the balance sheet, capital will fall out of the system in the process. Essentially, it's no different from selling mortgage bonds, other than the pace that money falls out of the system.

The bottom line, as the bonds mature, is that if the Fed doesn't at least retain the balance sheet, capital falls out of the economy. This is no different from the securities Fed selling.