Does the Federal Reserve Obtain Competitive and Appropriate Prices in Monetary Policy Implementations?

The Federal Reserve's (Fed) monetary policy implementations often involve trades of huge amount in a short period of time, which dwarf any individual dealer's inventory capacity. Because of this, dealers strategically manage inventory, and charge uncompetitive pricing to the Fed, which is particularly acute if large dealers dominate in inventory capacity. Using the Fed's purchase of agency mortgage-backed securities (MBSs), we show empirically that (1) dealers accumulate MBS inventory from two months before the Fed's purchase date and a few large dealers acquire the bulk of inventory, (2) larger dealers sell more MBSs and at higher prices to the Fed, (3) dealers charge discriminatory prices against the Fed relative to non-Fed customers, and (4) the uncompetitive pricing worsens when the Fed increases purchase amount