Rethinking Central Bank LSAPs: The Power of Market Functioning Purchases

Andrew Smith and Victor J. Valcarcel

No RWP 26-05, Research Working Paper from Federal Reserve Bank of Kansas City

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.

Keywords: monetary policy; balance sheet policy; SOMA; quantitative easing; primary dealers; market making; narrative restrictions; structural VAR; liquidity; intermediation (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Pages: 44
Date: 2026-07-17
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DOI: 10.18651/RWP2026-05

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