John C. Williams, president of the Federal Reserve Bank of New York, just said the quiet part out loud: the Fed doesn’t really know how small its balance sheet can get. For a central bank that spent the last few years methodically unwinding trillions in bond holdings, that’s a remarkably candid admission.

The comment lands at a pivotal moment. The Fed’s quantitative tightening campaign, which began in June 2022 and ran through December 2025, pulled roughly $2.4 trillion off the balance sheet, bringing it down from a pandemic-era peak of approximately $9 trillion to about $6.5 trillion. That’s still around 21-22% of US GDP, well above pre-2008 levels but a meaningful retreat from the extraordinary levels reached during COVID-era stimulus.

The ‘ample reserves’ guessing game

The Fed operates under what it calls an “ample reserves” framework, essentially a commitment to keep enough cash sloshing around the banking system that overnight lending markets function smoothly. The tricky part is figuring out where “ample” ends and “not enough” begins.

Williams has described reserves as currently sitting “somewhat above ample.” He characterized banks’ demand for reserves as “inherently nonlinear and subject to uncertainty.” The relationship between reserve levels and market stress isn’t a smooth downward slope.

The Fed learned this lesson the hard way in September 2019, when overnight repo rates suddenly spiked to 10%, catching virtually everyone off guard. Reserves had been drained through an earlier round of QT, and the plumbing of the financial system seized up with almost no warning. The episode forced the Fed to inject emergency liquidity and effectively restart asset purchases months before anyone expected.

Williams has suggested that once the balance sheet reaches its target level, the Fed may resume gradual asset purchases, not as stimulus, but simply to accommodate growing demand for physical currency and other liabilities.

What investors should watch from here

The key indicators to monitor are Treasury repo rates and the spread between the Fed’s overnight reverse repo facility usage and reserve balances at commercial banks. When the overnight reverse repo facility drains toward zero and repo rates start creeping above the Fed’s target range, that’s typically the canary in the coal mine signaling reserves are getting tight.

The 2019 playbook is instructive. Back then, stress appeared suddenly and without much advance warning. Williams and his colleagues are clearly determined not to repeat that experience, which explains the cautious, almost defensive tone of these remarks.