Powell has signalled that the Federal Reserve may stop shrinking its balance sheet in the coming months to preserve liquidity in overnight funding markets

Federal Reserve Chair Jerome Powell said Tuesday that the end of the Fed’s balance sheet reduction program — its ongoing quantitative tightening (QT) effort — may soon come into sight.

Powell noted that the central bank’s long-standing aim is to maintain sufficient liquidity in the financial system to ensure stable control of short-term interest rates and normal money market functioning. “We may approach that point in coming months,” he said, adding that officials are “closely monitoring a wide range of indicators” to assess when that threshold is reached.

Speaking at a conference hosted by the National Association for Business Economics in Philadelphia, Powell said recent data suggest the process is entering its final phase. “Some signs have begun to emerge that liquidity conditions are gradually tightening,” he said, pointing to firmer repo rates and occasional, short-lived funding pressures as evidence. He also defended the Fed’s use of its balance sheet and related tools as essential to monetary policy operations.

Debate over when QT will end has intensified in recent weeks as usage of the Fed’s reverse repurchase facility (RRP) — a key mechanism that helps set a floor under short-term rates — has dropped to near zero. The facility, which once absorbed more than $2.6 trillion in excess liquidity created during the pandemic, now serves a diminished role, meaning QT is directly reducing reserves in the banking system. Powell acknowledged that falling reserves can heighten the risk of liquidity shortages, similar to those that disrupted markets in 2019, though he noted that the Fed’s Standing Repo Facility now provides an additional backstop to stabilize funding markets if needed.