FILE PHOTO: U.S. Federal Reserve Chair Jerome Powell speaks during a press conference, following the issuance of the Federal Open Market Committee's statement on interest rate policy, in Washington, D.C., U.S., September 17, 2025. REUTERS/Elizabeth Frantz/File Photo

By Michael S. Derby

(Reuters) -Federal Reserve Chair Jerome Powell said on Tuesday the end of the central bank’s long-running effort to shrink the size of its holdings, widely known as quantitative tightening, or QT, may be coming into view.

Given the central bank’s long-running goal of leaving enough liquidity in the financial system to allow for firm control of short-term rates and normal money market volatility, Powell said “we may approach that point in coming months, and we are closely monitoring a wide range of indicators” to know if that has happened.

As a signal the end stage is getting closer, "some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates,” Powell said at a gathering held by the National Association for Business Economics in Philadelphia.

In his remarks, Powell also defended the central bank's use of the balance sheet and other tools for monetary policy.

The endgame for QT has been a topic of market debate for some time but has gained urgency over recent weeks as the Fed's reverse repo facility, or RRP, has fallen to effectively near-zero usage. The RRP tool helps set a soft floor underneath short-term rates and assists the Fed in keeping its interest rate target within the desired range, now set at between 4% and 4.25%. That facility peaked at $2.6 trillion at the end of 2022.

The RRP facility has largely existed to mop up the excess liquidity the Fed created during the pandemic and now that it has been effectively drained out, QT will now lower reserves.

The further reserves fall, the more likely liquidity scarcity could emerge with little warning and rattle money markets, in turn complicating the Fed's ability to keep its monetary policy interest rate target where it wants it to be.

Something like that played out in September 2019 during the last period of QT, forcing the Fed to intervene unexpectedly to add liquidity back to the system. Since then, the Fed has added something called the Standing Repo Facility - it provides fast cash loans to eligible financial firms - as a shock absorber for market liquidity needs.

Money markets and the Fed got through the end of the third quarter smoothly, with markets not needing to turn to the Fed for liquidity needs in any substantial size.

STILL NOT ENTIRELY CLEAR WHEN QT MIGHT END

The QT process, which has been running since 2022, is designed to remove excessive amounts of liquidity the Fed added to financial markets during the COVID-19 pandemic. Cash was pumped into the financial system via large-scale purchases of Treasury and mortgage bonds, which were aimed at stabilizing markets and providing stimulus when the Fed’s short-term rate target was at near-zero levels.

The asset buying helped Fed holdings more than double to around $9 trillion. Allowing a set amount of bonds to mature each month and not be replaced has helped take the Fed balance sheet down to $6.6 trillion.

It’s unclear how much further the Fed can go with QT but some officials have said there remains plenty of liquidity in the financial system. Powell did not say how far the Fed would be able to shrink its holdings.

A survey of large banks, money managers and others conducted before the Fed's September 16-17 Federal Open Market Committee meeting projected a January 2026 end-date for QT, with the overall size of the Fed's balance sheet at $6.2 trillion. Survey respondents also said they saw bank reserve levels at $2.9 trillion from their current level of $3 trillion.

FED CHIEF DEFENDS USE OF BALANCE SHEET, OTHER TOOLS

Powell noted in his remarks that broadly speaking, "our ample reserves regime has proven remarkably effective for implementing monetary policy and supporting economic and financial stability.”

The Fed's usage of its balance sheet as a policy tool, as well as the tools it uses to help manage interest rates, has been controversial, no less so than with the current Trump administration. Treasury Secretary Scott Bessent has accused the central bank of broad mission creep with the use of the balance sheet, which he believes has distorted financial markets.

The Fed has also caught heat for its interest rate management tools, which have paid out so much money to eligible financial firms that the Fed is now managing a $244 billion loss, causing some politicians to weigh whether those powers should be removed.

Powell cautioned against such a move, saying "if our ability to pay interest on reserves and other liabilities were eliminated, the Fed would lose control over rates."

To get it back, "large sales of securities over a short period of time would be needed to shrink our balance sheet and the quantity of reserves in the system," Powell said, adding "the volume and speed of these sales could strain Treasury market functioning and compromise financial stability."

(Reporting by Michael S. Derby; Editing by Andrea Ricci)