RWP 26-05, July 2026
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.
JEL classifications: E3, E4, E5
Article Citation
Smith, A. Lee, and Victor J. Valcarcel. 2026. “Rethinking Central Bank LSAPs: The Power of Market Functioning Purchases.” Federal Reserve Bank of Kansas City, Research Working Paper no. 26-05, July. Available at External Linkhttps://doi.org/10.18651/RWP2026-05
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
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