Staff Reports
The Federal Reserve’s Market Functioning Purchases
Number 998
December 2021

JEL classification: E53, E44, G12, G01

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

In March 2020, massive customer selling of U.S. Treasury securities and agency mortgage-backed securities (MBS) triggered by the COVID-19 pandemic overwhelmed dealers’ capacity to intermediate trades, contributing to a marked deterioration of market functioning. The Federal Reserve promptly took numerous steps to address the market disruptions, including the initiation of market functioning purchases of Treasury securities and agency MBS. 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. Market liquidity improved steadily after mid-March, suggesting that the Fed’s efforts were effective, and the security 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. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. 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. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. 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. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. 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. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. 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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