Federal Reserve "third-in-command" Williams: The Fed may soon expand its balance sheet to meet liquidity needs

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New York Fed President Williams stated that the Federal Reserve may soon need to expand its balance sheet through bond purchases to meet the liquidity needs of the banking system.

On November 7, according to media reports, at the 2025 ECB Money Market Conference in Frankfurt, Germany, Williams stated in his speech manuscript that when the level of bank reserves falls from the current "slightly above ample" state to an "ample" level, the Fed will begin the process of "gradually purchasing assets."

Last week, the Fed announced it would effectively halt its three-year balance sheet reduction process starting December 1. Some analysts expect the Fed may start expanding its holdings through bond purchases in the first quarter of next year. Williams emphasized that purchasing bonds to maintain appropriate liquidity is not an economic stimulus measure, but rather a natural extension of the ample reserves strategy and does not represent a change in monetary policy stance.

Balance Sheet Reduction Process Officially Ends

Last week, the Fed decided to end its three-year process of reducing the size of its balance sheet. This reduction began in 2022, aiming to reverse its large-scale asset purchases during the pandemic. Since the pandemic in 2020, the Fed, through Treasury and mortgage-backed securities purchase programs, expanded its total asset holdings from less than $5 trillion to a peak of about $9 trillion to support the economy and financial system.

Since 2022, the Fed has allowed a certain amount of securities to mature without replacement, aiming to maintain sufficient liquidity in the financial system to keep strong control over the federal funds target rate range, while allowing for normal money market fluctuations.

Recently, the rise in money market rates and active use of the Fed's liquidity tools have signaled to the central bank that the balance sheet reduction has proceeded sufficiently, prompting it to stabilize the overall size of the balance sheet at the current $6.6 trillion level.

Reserve Level Becomes a Key Indicator

Williams said he is closely monitoring various market indicators related to the federal funds market, repo market, and payments to assess the status of reserve demand. He noted that determining exactly when the Fed will reach the reserve level at which it needs to begin injecting funds into the system is quite challenging.

Williams stated:

"Based on continuing pressures in the repo market recently, and other signs that reserves are shifting from 'ample' to 'ample enough,' I expect that reaching an ample level of reserves is not far off."

He emphasized that the Fed's rate control tools, such as reverse repo and standing repo facility, are operating well, and he expects the latter will continue to be actively used by eligible institutions.

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