“Fed’s No. 3”: The Federal Reserve may soon restart bond purchases to manage liquidity.

“Fed’s No. 3,” New York Fed President John Williams, believes the Fed may soon need to restart bond purchases as a technical measure to maintain control over short-term interest rates. Williams emphasized that such purchases will have no impact on monetary policy. On Wednesday, Eastern Time, Williams said at the 2025 U.S. Treasury Market Conference at the New York Fed that the Fed is looking for an “ample” level of bank reserves to ensure firm control of the Fed’s rate targets and normal conditions in the money markets. He said: “Based on ongoing pressure in the repo market and other signs that reserves are moving from abundant to ample, I expect we will soon reach the ample reserves level.” At that point, the Fed will gradually begin purchasing assets to maintain the ample level of reserves. Also on Wednesday, this year’s Trump-appointed Fed Governor Stephen Miran again mentioned the impact of stablecoins. After stating last Friday that growth in stablecoins could lower the Fed’s benchmark rate by 0.4 percentage points, Miran said this time the impact of stablecoins could reach as much as 60% of savings during 2000 to 2010. Timing for Asset Purchases Approaching During his keynote speech at the 2025 U.S. Treasury Market Conference, Williams said: “Looking ahead, our next balance sheet strategy will be to assess when reserves reach ample levels. At that point, we will gradually begin asset purchases to maintain the ample reserve level, since other Fed liabilities continue to grow and the potential demand for reserves grows as well.” Williams pointed out that determining when the system reaches ample reserves is “an inexact science.” He said he will closely monitor multiple market indicators related to the federal funds market, repo market, and payments, to assess the need for reserves. Williams made these comments after short-term funding markets in the U.S. experienced volatility around the end-October FOMC meeting. At the Fed’s FOMC meeting two weeks ago, the committee decided on a second consecutive 25-basis-point rate cut to help support a weak job market, despite inflation stubbornly remaining above the central bank’s 2% target. The Fed also announced plans to end quantitative tightening (QT)—the reduction of its balance sheet—at the beginning of December, ending a key phase in the current tightening cycle. Last week, Wallstreetcn noted that funding pressures in the U.S. money market are raising growing Wall Street concerns, with major investment banks warning that ongoing funding pressures may force the Fed to act more quickly, possibly even restarting its long-idled asset purchase program. Shrinking from $9 Trillion Peak to $6.6 Trillion Previously, quantitative tightening allowed the Fed’s holdings of Treasuries and mortgage-backed securities to mature without replacement, aiming to remove the added liquidity from the pandemic era. This effort shrank the Fed’s balance sheet from its 2022 peak of $9 trillion to about $6.6 trillion now. Williams suggested the Fed will soon need to begin gradual direct bond purchases to maintain market liquidity and balance economic growth. Williams also said Wednesday that the Fed's Standing Repo Facility (SRF) is working well, providing qualified banks fast cash. He encouraged banks to use it when needed without worrying that borrowing from the Fed would send a negative signal. Williams said: “SRF’s effectiveness depends on market participants using the facility based on market conditions, without worrying about stigma or other barriers. I fully expect SRF to continue to be actively used in this way.” The aforementioned Wallstreetcn article noted that recently, Wall Street warned that three years of QT and massive Treasury issuance have pushed bank reserves into the danger zone. Barclays said that while a drop in the Treasury General Account (TGA) balance and lower Treasury issuance can provide short-term relief, year-end liquidity still faces multiple challenges, and the effectiveness of the Fed’s key tool, the SRF, has been questioned. Dallas Fed President Lorie Logan stated two weeks ago: “If rising repo rates prove not to be temporary, the Fed will need to begin purchasing assets.” Miran Advocates Swift Rate Cuts Fed Governor Miran said Wednesday that his independent estimate of stablecoin growth shows its impact could reach 30%-60% of savings from 2000–2010. He also emphasized that the U.S. dollar’s international status remains very strong. Last Friday, Miran told economists in New York that the surge of USD-pegged cryptocurrencies could lower “r-star”—the neutral rate that neither stimulates nor restrains economic growth. He cited previous research saying stablecoin growth could reduce the Fed’s benchmark rate by 0.4 percentage points. Miran emphasized that stablecoins have increased demand from overseas buyers for U.S. Treasuries and other dollar-denominated liquid assets, and this demand will continue to grow. “Stablecoins could be a trillion-dollar elephant in the central bankers’ room,” he said. Since joining the Fed Board, Miran has advocated for a series of 50-basis-point swift rate cuts to bring policy rates more in line with his estimate of the neutral rate. He believes the current neutral rate is much lower than most of his colleagues imagine, while the Fed’s current policy stance is far above neutral, imposing a significant constraint on the economy. Risk Warning and Disclaimer Markets have risks. 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