Fed’s Williams Signals Next Phase: From Shrinking to Growing the Balance Sheet

The Federal Reserve is getting close to the point where it will have to stop draining liquidity from the financial system and start adding it back, New York Fed President John Williams said Friday, outlining what could become the first balance sheet expansion since the post-pandemic runoff began. His message was careful but unmistakable: reserves in the banking system are moving from “abundant” to merely “ample,” and once they reach the level the Fed considers optimal for keeping control of short-term interest rates, the central bank will have to resume buying securities to keep that cushion from eroding. In other words, the era of quantitative tightening is ending not because the Fed wants to stimulate the economy, but because the plumbing of the dollar system demands it. 

Williams tied the shift directly to the Fed’s operating framework. Since 2019 the central bank has run monetary policy in an “ample reserves” regime, which basically means it keeps bank reserves high enough that the federal funds rate trades smoothly inside the FOMC’s target range, with help from standing tools like the overnight reverse repo facility and the standing repo facility. That system works as long as there is enough cash in the system. But in recent months, market signals—firmer repo rates, more frequent use of backstop facilities, and slower declines in the Fed’s own overnight reverse repo balances—have told policymakers that the cushion is thinning. Williams said he is “closely monitoring” those indicators to judge when reserves have reached the right level, and when that moment comes, “the next step” is to let the balance sheet grow again. 

Crucially, he stressed that this would not be quantitative easing 2.0. The Fed would be buying bonds to run the system, not to goose asset prices or drive long-term borrowing costs lower. That distinction matters for markets that have spent years treating any Fed balance sheet expansion as bullish. Williams framed the coming purchases as technical—gradual, predictable, and sized to match the economy’s and the banking system’s natural demand for reserves. As the U.S. economy grows, so does the need for central bank liabilities; if the Fed didn’t add assets over time, reserves would eventually get scarce and money market rates would start to misbehave. Friday’s remarks were the Fed’s way of saying: we want to stay in control of rates, so we will add liquidity before it becomes a problem. 

The timing lines up with the broader balance sheet pivot already announced in Washington. After shrinking its holdings from a pandemic-era peak of about $9 trillion to roughly $6.6–6.7 trillion, the Fed said it would halt runoff on December 1, ending a three-year process of balance sheet reduction. Chair Jerome Powell has also been clear in recent days that, at some point, the balance sheet will have to grow again simply to “accommodate the economy.” Williams’s speech effectively filled in the missing operational logic: we are almost at “ample,” and once we are there, we rebuild. Analysts tracking the Fed’s money-market signals now think the first months of 2026 could see steady, low-intensity purchases, though Williams left himself room to move sooner if repo pressures keep bubbling up. 

One interesting wrinkle in his comments was duration. Williams said the Fed may even choose to shorten the average maturity of the securities it holds. During the pandemic, the central bank bought a lot of longer-dated Treasuries and agency mortgage bonds, which made the portfolio much longer than the market as a whole. That was appropriate when the goal was to pull down long-term rates. It is less appropriate when the goal is just to supply reserves efficiently. Shifting new purchases toward shorter tenors would make the balance sheet more flexible and reduce interest rate risk on the Fed’s books—an attractive outcome at a time when the central bank is still running an accounting loss on its portfolio. 

Markets are likely to welcome a return of the Fed as a steady buyer of Treasuries, even if it comes with a “this is not QE” label. Treasury supply remains heavy, and every marginal source of demand helps stabilize funding costs and repo conditions. At the same time, investors will have to adjust their reflex that “bigger Fed balance sheet equals looser policy.” Williams went out of his way to separate the two: interest rates, he implied, will still be set by the economic outlook—growth, inflation, the labor market—while the balance sheet will be guided by the needs of the financial plumbing. With inflation easing and officials already talking about eventual additional rate cuts in 2025, the Fed is trying to preserve that separation: lower rates because the economy needs it, larger balance sheet because the system needs it. 

The bigger message is that the Fed has learned from the 2019 episode, when letting reserves run down too far triggered stress in repo markets and forced an emergency return to asset purchases. This time, officials are signaling early, watching more indicators, and telling markets plainly that growth in the balance sheet is a feature of the ample-reserves framework, not a sign of panic. If they execute on that plan, the transition from QT to modest balance sheet expansion could be one of the smoother policy handoffs in recent years.

Sources: Investing.com report on John Williams’s remarks; Reuters coverage of Williams’s speech at the ECB money markets conference; Bloomberg report on reserves nearing the “ample” level; New York Fed speech materials on the optimal supply of reserves; recent comments by Fed Chair Jerome Powell on ending QT and resuming balance sheet growth.