Federal Reserve number three official: may soon need to expand balance sheet to meet liquidity needs.

Federal Reserve Vice Chairman and New York Fed President John Williams said on Friday that the Federal Reserve, which last week decided to halt the reduction of its bond holdings, may soon need to expand its balance sheet by purchasing bonds. Williams, in a speech prepared for the "2025 European Central Bank Monetary Policy Conference" in Frankfurt, stated, "The next step in our balance sheet strategy will be to assess when bank reserves will transition from the current level slightly above ample to ample." He added that when this happens, "the process of gradually purchasing assets will be initiated." Williams said, "Based on recent ongoing pressures in the repo market, as well as other signs indicating the increasing number of reserves transitioning from ample to ample, I expect that we will reach the ample reserve level soon." Although the Federal Reserve has officially announced the end of quantitative tightening (QT) on December 1st, liquidity in the U.S. markets has remained tight recently and several indicators have issued clear warnings. On the one hand, key interest rate indicators have surged. Recently, the Secured Overnight Financing Rate (SOFR) briefly rose to 4.22%, significantly higher than the upper end of the Federal Reserve's target range for policy interest rates (4%). Despite the Federal Reserve cutting rates by 25 basis points last week, the abnormal surge in this rate seemed as though the Federal Reserve had not cut rates. On the other hand, the use of emergency tools by the Federal Reserve has increased. Due to month-end timing factors, the usage of the Standing Repo Facility (SRF) hit a historical high of $503.5 billion last Friday. Although the usage of this tool has decreased on Monday, it remains higher than the normal level. Additionally, as a "buffer" for financial system liquidity, bank reserves and overnight reverse repo tools (ON-RRP) have significantly decreased, with bank system reserves falling to $2.85 trillion and ON-RRP balances nearly exhausted, greatly weakening the fund buffering effect. The core of this liquidity crisis points directly to the U.S. Treasury. Under the impact of government shutdown, the Treasury cannot release liquidity normally, causing the balance of the Treasury General Account (TGA) to swell to around $1 trillion. Although the current situation bears similarities to the money shortage in 2019, analysts generally believe that this is more of a temporary liquidity imbalance. If the government shutdown is lifted or the Federal Reserve intervenes, the liquidity situation is expected to improve. Williams warned that determining when the Federal Reserve will reach the reserve level requiring the injection of cash into the system is very complex. He stated, "I am closely monitoring various market indicators related to the federal funds market, repo market, and payment markets to help assess the reserve demand situation." Williams emphasized that purchasing bonds to maintain appropriate liquidity levels does not represent stimulus policy. He stated, "Reserve management purchases will represent the natural next stage of the Federal Open Market Committee's implementation of an ample reserve strategy, and does not imply a potential change in monetary policy stance." He added that reverse repo and standing repo facilities, among other Federal Reserve rate control tools, have been operating well and are expected to see more frequent use in the future.