Journal Article

The Federal Reserve’s Market Functioning Purchases

Abstract: 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.

Keywords: Federal Reserve; asset purchases; Treasury securities; agency mortgage-backed securities; COVID-19;

JEL Classification: E44; G01; G12;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Economic Policy Review

Publication Date: 2022-07-01

Volume: 28

Issue: 1

Pages: 210-241

Note: This volume is a special issue titled “Policy Actions in Response to the COVID-19 Pandemic,” and features ten articles by New York Fed economists and coauthors from Markets, Supervision, the Board of Governors, and the Boston Fed.