Jerome Powell, Chairman of the US Federal Reserve, during a press conference following the Federal Open Market Committee (FOMC) meeting in Washington, DC, US, on Wednesday, September 17, 2025.
Kent Nishimura | Bloomberg | Getty Images
Federal Reserve Chairman Jerome Powell indicated on Tuesday that the central bank is nearing the point at which it will stop reducing the size of its bond holdings, but did not give a longer-term indication of where interest rates are headed.
Speaking at the National Association for Business Economics conference in Philadelphia, Powell presented a thesis on the Fed’s stance on “quantitative tightening,” or efforts to reduce the more than $6 trillion in securities it holds on its balance sheet.
While he did not provide a specific date for when the program would end, he said there are signs that the Fed is getting close to its goal of providing “ample” reserves to banks.
“It is our long-stated plan to stop the balance sheet rollback when reserves are somewhat above a level that we judge to be consistent with ample reserve conditions,” Powell said in prepared remarks. “We may be getting closer to that point in the coming months, and we are closely monitoring a wide range of indicators to make this decision.”
Although balance sheet issues are crucial to monetary policy, they are also important to financial markets.
When financial conditions are tight, the Fed aims to have “ample” reserves so that banks have access to liquidity and can keep the economy running. As conditions change, the Fed aims to have “abundant” reserves, a step down that prevents capital from flowing around the system.
During the Covid pandemic, the central bank has aggressively purchased Treasuries and mortgage-backed securities, swelling the balance sheet to close to $9 trillion.
Since mid-2022, the Fed has gradually allowed the proceeds accruing from those securities to move off the balance sheet, effectively tightening one aspect of monetary policy. The question has been how far the Fed needs to go, and Powell’s comments suggest the end is near.
He noted that “some signs are beginning to emerge that liquidity conditions are gradually tightening” and could indicate that further reductions in reserves would hamper growth. However, he also said the Fed has no plans to return to the size of its pre-Covid balance sheet, which was closer to $4 trillion.
On a related matter, Powell cited concerns about the Federal Reserve continuing to pay interest on bank reserves.
The Fed typically transfers the interest it earns from its holdings to the General Treasury Fund. However, because it had to raise interest rates too quickly to control inflation, it experienced operating losses. Congressional leaders such as Sen. Ted Cruz (R-Texas) have proposed ending payments on reserves.
However, Powell said that would be a mistake and would hamper the Fed’s ability to implement policy.
“While our net interest income was temporarily negative due to the rapid rise in interest rates to control inflation, this is highly unusual. Our net interest income will soon turn positive again, as has typically been the case throughout our history,” he said. “If our ability to pay interest on reserves and other liabilities is eliminated, the Fed will lose control of interest rates.”
Views on economics
On the larger issue of interest rates, Powell generally stuck to the latter version, which is that policymakers are concerned that the labor market is tightening and skewing the balance of risks between employment and inflation.
“While the unemployment rate remained low through August, payroll gains slowed sharply, likely in part due to lower labor force growth due to lower immigration and labor force participation,” he said. “In a less dynamic and somewhat softer labor market, downside risks to employment appear to have risen.”
Powell noted that the Federal Open Market Committee responded in September to the situation by cutting the federal funds rate by a quarter of a percentage point. While markets are strongly anticipating two additional cuts this year, and several Fed officials have recently endorsed that view, Powell was noncommittal.
“There is no risk-free path for policy as we deal with the tension between employment and inflation targets,” he said.
The Fed has been somewhat hampered by the government shutdown and its impact on economic data releases. Policymakers rely on metrics such as the non-farm payrolls report, retail sales and various price indicators to make their decisions.
Powell said the Fed continues to analyze conditions based on available data.
“Based on the data we have, it is fair to say that employment and inflation expectations do not appear to have changed much since our September meeting four weeks ago. However, the data available before the lockdown shows that economic activity growth may be on a somewhat stronger path than expected.”
The Bureau of Labor Statistics said it called in workers to prepare the monthly Consumer Price Index report, which will be released next week.
Powell said available data showed that commodity prices rose, largely due to tariffs rather than underlying inflation pressures.
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