Federal Reserve Resumes Treasury Bill Purchases to Manage Market Liquidity

On December 10, 2025, the Federal Reserve announced it would commence purchasing short-term Treasury bills to manage market liquidity and maintain effective control over interest rates. The initial phase involves acquiring approximately $40 billion in Treasury bills, with purchases starting on December 12. This decision follows the conclusion of the Fed's quantitative tightening program on December 1, which had reduced the central bank's balance sheet from $9 trillion to $6.6 trillion. Federal Reserve Chair Jerome Powell emphasized that this move is a technical adjustment to manage reserves and does not signal a shift in monetary policy.

The Federal Open Market Committee (FOMC) directed the Open Market Trading Desk at the Federal Reserve Bank of New York to increase System Open Market Account securities holdings through purchases in the secondary market of Treasury bills, or if needed, Treasury securities with remaining maturities of three years or less. These reserve management purchases are designed to accommodate projected trend growth in the demand for Federal Reserve liabilities and seasonal fluctuations, such as those driven by tax payment dates. The Desk plans to release monthly amounts of reserve management purchases on or around the ninth business day of each month, alongside a tentative schedule of purchase operations for the subsequent approximately thirty days.

In conjunction with the announcement of Treasury bill purchases, the Federal Reserve lowered the target range for the federal funds rate by 25 basis points to 3.50%-3.75% on December 10. This decision was approved by a 9-3 vote, with dissenting members expressing differing views on the appropriate magnitude of the rate cut. The policy statement removed the description of the unemployment rate as "low," reflecting concerns over moderating economic activity and a rise in unemployment. The latest dot plot maintained the projection of an additional 25 basis point rate cut in 2026.

The Federal Reserve's actions have significant implications for financial markets and the broader economy. The resumption of Treasury bill purchases is expected to ease money-market strains and restore liquidity, particularly in the $4 trillion U.S. repo market. Analysts view the policy shift as a timely intervention, especially ahead of the year-end period, which typically sees heightened money-market volatility. This marks a pivot back to balance sheet expansion to support market operations and maintain effective control over interest rates.

In the stock market, the S&P 500 rose 0.7%, nearly hitting a record high, the Dow gained 497 points (1%), and the Nasdaq climbed 0.3% following the Fed's rate cut and announcement of Treasury bill purchases. While the rate cut was anticipated, markets reacted positively to Fed Chair Jerome Powell’s comments, which suggested further rate reductions weren't ruled out. The bond market experienced declining yields, with the 10-year Treasury dropping to 4.15% and the two-year yield falling to 3.53%. Traders now estimate a 71% likelihood of at least two rate cuts in 2026.

The Federal Reserve's decision to resume Treasury bill purchases and lower interest rates reflects its commitment to ensuring ample liquidity in the banking system and supporting economic growth. These actions are intended to prevent market volatility reminiscent of 2019 and to address concerns over tightening liquidity and rising money market rates that could undermine control over the federal funds rate.

The Federal Reserve's current actions bear similarities to its responses during previous periods of economic uncertainty. For instance, in 2019, the Fed engaged in similar operations to address liquidity shortages in the repo market, which had led to spikes in short-term borrowing rates. However, the scale and timing of the current interventions are tailored to the unique challenges of the present economic environment, including the aftermath of the quantitative tightening program and the need to support a slowing economy.

By providing a comprehensive analysis of the Federal Reserve's recent actions, including the resumption of Treasury bill purchases and interest rate adjustments, this article aims to equip readers with a thorough understanding of the central bank's strategies to manage market liquidity and support economic stability.