Powell Says Fed May Conclude Balance Sheet Reduction in Coming Months

October 15 — Federal Reserve Chair Jerome Powell stated on Tuesday that the Federal Reserve’s extended program of balance sheet reduction, commonly referred to as quantitative tightening (QT), could be approaching its endpoint within the next few months.

Powell explained that the Fed’s enduring objective has been to ensure the financial system retains adequate liquidity so that short‑term interest rates can be effectively managed and money markets operate normally. He said the central bank is “closely monitoring a range of indicators” to assess whether the appropriate conditions to pause QT are materializing.

Speaking at the National Association for Business Economics conference in Philadelphia, Powell observed signs of tightening liquidity conditions, including a general rise in repo rates and episodic, temporary stress on particular dates.

Since mid‑2022 the Fed has been withdrawing liquidity through QT to absorb the large volume of pandemic‑era asset purchases. Those purchases of U.S. Treasuries and mortgage‑backed securities expanded the Fed’s balance sheet to above $9 trillion, and through non‑reinvestment of maturing securities the balance sheet has since declined to about $6.6 trillion.

The ultimate size to which the Fed’s balance sheet will shrink remains undetermined. Some policymakers judge that reserves in the financial system remain plentiful, allowing QT to proceed without destabilizing money markets.

Powell did not identify a final target for the balance sheet, but he underscored that the ample reserves framework has so far been effective in conducting policy and supporting economic and financial stability.

He cautioned that removing the Fed’s authority to pay interest on excess reserves and on reverse repos would undermine an essential tool for rate control and could place substantial strain on markets. Reflecting on experience since 2020, Powell said the Federal Reserve can apply balance sheet instruments with greater flexibility going forward.

Observers note that a key objective of the Fed’s approach is to prevent a recurrence of the 2019 episode when balance sheet reductions contributed to acute stress in the overnight funding market, prompting the central bank to resume asset purchases to restore stability. Powell indicated that the Fed has agreed internally to proceed with “very cautious” measures to avoid the type of money market disruption seen in September 2019.

While he did not categorically dismiss market expectations of another rate cut at the October 28–29 meeting, he also did not explicitly endorse that outcome, observing that the economic outlook “has not changed significantly” since the prior decision to lower rates.

Powell noted that since the federal funding lapse on October 1 the Fed has lacked access to several routine government statistical releases that inform projections and rate deliberations, and he added that pre‑shutdown data suggested economic activity may be more resilient than anticipated.

A substantial portion of his remarks was devoted to defending the Fed’s policy choices since 2020 amid recent public criticism from political figures, including Treasury Secretary Scott Bessent and potential Fed chair candidates.