Economic Policy Review
The Federal Reserve’s Market Functioning Purchases
Volume 28, Number 1
June 2022

JEL classification: E53, E44, G12, G01

Authors: Michael J. Fleming, Haoyang Liu, Rich Podjasek, and Jake Schurmeier

This article assesses the rationale, operations, and implications of the Federal Reserve’s market functioning purchases. The security purchases were introduced in March 2020, when massive customer selling of U.S. Treasury securities and agency mortgage-backed securities triggered by the COVID-19 pandemic overwhelmed dealers’ capacity to intermediate trades, contributing to a marked deterioration of market functioning. Purchases quickly expanded to over $100 billion per day as the Fed announced plans to buy securities “in the amounts needed” to support market functioning and the effective transmission of monetary policy. Aside from their speed and scale, the purchases were novel in that their pace and distribution depended on observable measures of market functioning. At the same time, the purchases relied on common tools, specific precedent, and general principles of a central bank’s role. After the purchases were launched, market functioning improved steadily, and the purchases were scaled back accordingly.

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Author Disclosure Statement(s)
Michael Fleming
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance (members of which include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of BrokerTec data was subject to review by BrokerTec Americas LLC prior to circulation.

Haoyang Liu
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance (members of which include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of BrokerTec data was subject to review by BrokerTec Americas LLC prior to circulation.

Rich Podjasek
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance (members of which include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of BrokerTec data was subject to review by BrokerTec Americas LLC prior to circulation.

Jake Schurmeier
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance (members of which include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of BrokerTec data was subject to review by BrokerTec Americas LLC prior to circulation.
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