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Rethinking Central Bank LSAPs: The Power of Market Functioning Purchases

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Abstract

We show that operationally similar central bank asset purchases can have markedly different effects. Combining security-level data on the Federal Reserve’s duration-adjusted asset holdings with narrative event-based identification reveals that purchases made for accommodation strongly affect yields, while purchases made for market functioning primarily enhance liquidity. We advance a partial equilibrium model of an intermediated bond market that can reconcile these findings. When trading flow is orderly, large-scale asset purchases (LSAPs) operate through the expected supply of duration with large effects on yields. When trading flow is disorderly, LSAPs reduce dealer inventories, improve liquidity, and compress bid-ask spreads.

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  • Andrew Lee Smith & Victor J. Valcarcel, 2026. "Rethinking Central Bank LSAPs: The Power of Market Functioning Purchases," Research Working Paper RWP 26-05, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:103551
    DOI: 10.18651/RWP2026-05
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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