①New York Federal Reserve President Williams The report indicates that the Federal Reserve may soon need to expand its balance sheet by purchasing bonds to meet the liquidity needs of the financial system; Williams predicts that the Federal Reserve is not far from reaching the point where reserve levels transition from "ample" to "ample but not excessive".
New York Federal Reserve President Williams said on Friday that the Fed may soon need to expand its balance sheet by buying bonds to meet the liquidity needs of the financial system. Last week, the Fed decided to stop reducing its bond holdings starting in December.
Speaking at the ECB's 2025 Monetary Markets Conference in Frankfurt, Williams said, "The next step in our balance sheet strategy will be to assess when reserves will fall from the current 'slightly above ample' level to 'ample'. When that moment arrives, we should begin the process of gradually restarting asset purchases."
He added, "Given the continued pressure on the repo market recently, and the growing signs that reserve levels are transitioning from 'ample' to 'ample but not excessive,' I expect we are not far from reaching that point."
At last week's Federal Open Market Committee (FOMC) meeting, the Federal Reserve announced that it would officially end its three-year "balance sheet reduction" program on December 1. This process aims to gradually reduce the bond holdings that the Fed purchased on a large scale during the pandemic to support the economy and financial system.
Since 2020, the Federal Reserve has been purchasing U.S. Treasury securities and mortgage-backed securities on a large scale. (MBS), which once brought its total balance sheet size to over $9 trillion.
Starting in 2022, the Federal Reserve began to stop renewing maturing bonds in order to remove excess liquidity from the market, while maintaining sufficient reserves to ensure "solid control" of the federal funds rate range and tolerating normal fluctuations in the money market.
However, recent signs of rising money market interest rates and active use of the Federal Reserve's standing liquidity facilities indicate that market reserves are approaching critical levels, prompting the Fed to decide to stabilize its balance sheet at its current level of approximately $6.6 trillion.
Some analysts expect the Federal Reserve to resume expanding its balance sheet through bond purchases as early as the first quarter of next year.
Bank of America strategists believe that the Federal Reserve has previously overdrawn its reserves, bringing them to the edge of saturation, so the market will soon force them to take action.
However, Williams cautioned that determining when “ample reserves” have been reached remains challenging. “I am closely monitoring a range of indicators in the federal funds market, the repurchase market, and the payment system to assess the state of reserve demand.”
Williams emphasized that if bond purchases resume in the future, it will only be a liquidity management operation and will not mean that monetary policy has shifted back to a "new round of quantitative easing".
"These bond purchases, which are of a reserve management nature, are a natural continuation of the Fed's 'ample reserve framework' and do not signify a change in the stance of monetary policy."
He also stated that the Federal Reserve's various interest rate control tools, including the overnight reverse repurchase facility and the standing repurchase facility, are functioning well, and he expects the latter to continue to be actively used by the market in the future to provide short-term cash support to financial institutions.
In addition, Dallas Fed President Lori Logan said last Friday that if repurchase rates remain high, the Fed will need to initiate asset purchases.
(Article source: CLS)
