Fed to Resume Net Asset Purchases With $40 Billion in Securities This Month — Update

By Matt Grossman

The Federal Reserve is ready to expand its balance sheet once more by buying short-term Treasury securities, aiming to head off bouts of pressure in overnight lending markets that are critical to the broader financial system.

The Fed said it would start its balance-sheet expansion with $40 billion of securities purchases this month, with plans to taper the pace of the new buying sometime next year.

The move is a quick about face for a central bank that was shrinking its securities holdings up until two weeks ago, when it closed out a three-year effort to reduce its footprint in financial markets by letting bonds roll off its balance sheet.

It has been a longstanding part of the Fed's planned presence in financial markets to resume modest balance-sheet expansion eventually, but the program's timing is a response to recent stretches of volatility in short-term lending markets that have caught traders' and policymakers' attention.

As a side effect of the Fed's slimmed-down bondholdings, banks and other institutions have at times faced elevated costs to borrow cash overnight in the repo market in recent weeks, a trend the Fed monitors closely out of concern that stress could spill over into the broader financial system. The $30 trillion Treasury market is especially sensitive to disruptions in overnight lending, because some major Treasury-market players rely on repo borrowing to finance their holdings.

The renewed bondbuying isn't intended as part of the Fed's actions to steer the economy. Its goal is to minimize repo-market strains by bolstering banks' access to reserves--a cash-like currency that banks keep on deposit at the Fed and can trade among themselves. If the Fed doesn't add to its bondholdings over time, the supply of reserves gradually decreases and lags behind economic growth, squeezing repo markets and potentially pushing up interest rates out of alignment with the Fed's goals.

The funding pressure seen so far hasn't been disruptive, but the Fed's move to grow its balance sheet modestly again makes sense on a risk-management basis, said Eric Winograd, chief U.S. economist at AllianceBernstein.

"Even if it isn't a problem now, why would you wait until it is a problem until you start dealing with it?" Winograd said.

New York Fed President John Williams, responsible for overseeing the central bank's market operations, suggested in a speech last month that bond purchases might resume soon, given that a tighter supply of bank reserves had already begun to push up interest rates in repo markets on some recent days.

In shrinking its balance sheet, the Fed's intention was to bring reserves in the banking system down to a level that is sufficient, but not excessive, Williams said on Nov. 12. "I expect that it will not be long before we reach ample reserves," the level that would signal the Fed to resume bond purchases, he said.

Adding to the urgency to act, a Fed tool for staving off repo-market pressure--a lending program called the standing repo facility--hasn't been entirely successful at keeping overnight interest rates in check. Last month, Williams met privately with a group of bank executives to solicit their feedback on the SRF as the Fed considers tweaks that could make the lending program more effective, The Wall Street Journal reported, citing people familiar with the matter.

Additional repo-market pressure might be around the corner as the end of the year approaches. Friction in overnight funding markets often increases on major calendar dates such as Dec. 31 as financial institutions tidy up their balance sheets for financial reporting, which can further strain trading desks as they rush to borrow funds overnight.

The plan to begin the securities transactions--which the Fed calls reserve-management purchases--comes alongside the central bank's decision to cut interest rates by a quarter percentage point at a third straight meeting to 3.5% to 3.75%.

Write to Matt Grossman at matt.grossman@wsj.com

(END) Dow Jones Newswires

December 10, 2025 14:37 ET (19:37 GMT)