The Federal Reserve's restart of "balance sheet expansion" may not be far off, with an announcement possible as early as December?

After Federal Reserve officials sent strong signals that the central bank is "not far" from restarting balance sheet expansion, Citi predicts the Fed could announce as soon as December and implement a new round of Treasury purchases in January.

Federal Reserve Officials Send Clear Signals

New York Fed President John Williams gave a speech this week, hinting that the Fed will soon begin expanding its balance sheet to ease pressure in funding markets.

Williams said:

Based on the recent ongoing repo market pressures and other signs that reserves have shifted from ample to adequate, I expect it won’t be long before we reach adequate reserve levels.

The New York Fed held an unscheduled meeting this week with major Wall Street banks, with the core topic being collecting feedback from primary dealers (banks that underwrite government debt) on the use of the Fed’s standing repo mechanism. This highlights officials’ concerns about the tense U.S. money market situation.

Key gauges of short-term borrowing costs continue to flash warning signs. The triparty repo rate rebounded again this week, at one point nearly 0.1 percentage points above the Fed's interest rate on reserve balances.

New York Fed market operations chief Roberto Perli admitted that some borrowers have consistently found it difficult to obtain repo funds at rates close to the central bank’s reserve rate, with repo transactions conducted above the reserve rate now at the highest levels since the end of 2018 and 2019.

Analysts warn that as year end approaches, markets will face further pressures. Banks typically shrink their balance sheets at year end for financial reporting purposes, which could worsen the cash crunch. After three years of quantitative tightening, excess cash in the banking system has dropped sharply.

Balance Sheet Reductions to Halt in December; Treasury Purchases to Begin in January or February

Citi currently expects the Fed’s balance sheet reduction to stop by December 1. The most likely path is for the Fed to announce more Treasury purchases at its January meeting, to take effect February 1.

However, the probability of announcing bond purchases at the December meeting is about the same as in January. Since late October, repo market pressures have eased, and the secured overnight financing rate (SOFR) has not breached 4% (the upper limit of the federal funds target range) in recent days. However, pressures could resurface in the coming weeks, increasing the urgency of a December announcement.

Citi also predicts the Fed is most likely to lower the interest rate on reserve balances (IORB) by 5 basis points at the December meeting, which would help keep repo rates within the federal funds target range.

$2 Billion Net Purchases Per Month Are Sufficient to Maintain Liquidity

Analysts believe the Fed only needs to make relatively modest net purchases of Treasuries to keep reserves in an adequate range.

Based on the current reserve levels growing about 5% annually (to keep reserves as a roughly constant share of nominal GDP), plus circulating currency also growing about 5% per year, SOMA needs a monthly net increase of about $20 billion.

Specifically, this means the Fed will reinvest all maturing Treasuries, plus make additional purchases of about $20 billion in Treasuries each month to offset asset decreases caused by maturing mortgage-backed securities (MBS). Citi believes this purchasing volume is sufficient to keep SOFR (and the Treasury General Collateral Repo Rate, TGCR) within the target range on regular trading days next year.

Balance Sheet Forecast: $7 Trillion By End 2027

Citi calculates the Federal Reserve’s total balance sheet assets will grow steadily from $6.628 trillion in November 2025 to $7.068 trillion by December 2027.

Within this, U.S. Treasury holdings will increase from the current $4.192 trillion to $5.022 trillion, while MBS holdings will gradually decline from $2.067 trillion to $1.682 trillion.

On the liabilities side, the reserve balance is expected to rise from the current $2.887 trillion to $3.350 trillion by the end of 2027. Currency in circulation will grow steadily from $2.423 trillion to $2.548 trillion. It is notable that reverse repo (RRP) balances are expected to stay at extremely low levels.

This path of balance sheet growth reflects the Fed’s shift from quantitative tightening to “organic growth.” But Citi stresses that this absolutely does not represent a change in monetary policy stance, and is merely a technical adjustment to meet growing liability needs at the Fed.

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