The deadlock in the world’s largest economy is evident and worsening, mainly with public debt reaching the zone of $28 trillion.
The only solution visible on the horizon to maintain creditworthiness is monetary expansion (technically termed monetization of debt).
To understand these unusual developments, one must examine the Federal Reserve’s room for action in providing liquidity to the economy and what the term “printing dollars” actually means in practice.
Will it create hyperinflation and address the real causes of the fiscal derailment?
John Williams, President of the Federal Reserve Bank of New York, stated on Friday, November 7, 2025, that the U.S. central bank, which last week decided to halt the reduction of its bond portfolio, may soon need to resume bond purchases, thereby increasing the size of its balance sheet.
“The next step in our balance sheet strategy will be to assess when the level of reserves has reached the point of ‘ample’ (adequate), from the current condition of ‘somewhat above ample’ (slightly above adequate),” Williams said in the text of his speech at the European Central Bank Conference on Money Markets 2025 in Frankfurt.
“When that happens,” he added, “it will be time to begin the process of gradual asset purchases.”
“Based on the recent persistent pressures observed in the repo market (short-term borrowing market) and other increasing signs that reserves are moving from a level of excess quantity toward adequacy, I expect we will soon reach the point of adequacy (ample) regarding reserves,” Williams added.
At the latest meeting of the Fed Board, it was announced that starting December 1, the three-year process of shrinking the bond portfolio acquired by the central bank as part of measures to support the economy and the financial system during the COVID-19 pandemic will be terminated.
Since 2020, the Fed has doubled the total size of its assets, peaking at $9 trillion, through massive purchases of U.S. Treasuries and mortgage bonds.
Since 2022, it has allowed the maturation of a predetermined amount of securities without renewal (rollout), aiming to maintain sufficient liquidity in the financial system to keep steady control of the federal funds rate, its main tool for influencing the economy, while allowing moderate volatility in money market funds.
Recent signs of rising money market rates, combined with frequent use of the Fed’s liquidity tools, showed the bank that it had gone far enough in the process of reducing its portfolio, leading to the decision to maintain the balance sheet steady at the current level of $6.6 trillion.
Some analysts estimate that the Fed could resume bond purchases as early as the first quarter of 2026.
Williams warned that it is difficult to estimate exactly when the Fed will reach the reserve level that would again require cash inflows into the system.
“I closely monitor a range of market indicators related to the fed funds market, the repo market, and payment systems, to assess the state of reserve demand,” he said.
However, he warned that bond purchases for liquidity management are not a form of economic stimulus through monetary policy.
“Purchases within the framework of reserve management will constitute the natural next stage in implementing the ‘ample reserves’ strategy of the Federal Open Market Committee (FOMC) and do not imply any change in the fundamental direction of monetary policy,” said Williams.
He further added that the Fed’s interest rate control tools, such as the reverse repo facility and the Standing Repo Facility (mechanisms ensuring short-term liquidity in the banking system), operate effectively, and he expects active use of the latter, which provides liquidity to eligible entities, in the near future.
The expansion of the money supply and the role of the Federal Reserve
It is generally argued that referring to the operations of the Federal Reserve as “money printing” is not rhetorical but factual.
This position is based on a remark by Ben Bernanke in 2010, in which he described how the Fed digitally increases accounts.
However, this view, though partially valid, overlooks how the system truly functions.
To understand the growth of the money supply, it is essential to distinguish between the creation of reserves and the creation of deposits.
It is considered that referring to the Federal Reserve’s operations as “money printing” is not merely rhetorical but structurally accurate.
“Money printing” describes the Fed’s ability to create unlimited digital reserves to buy government debt, and it is simultaneously argued that the operations of the U.S. Treasury Department (Treasury) influence leverage in the financial system.
The process essentially functions as money printing and should be regarded as such, according to this view.
Although this perspective highlights the magnitude and potential consequences of monetary interventions, it misunderstands the process by which money is created in the modern banking system.
To clarify, it is crucial to separate the creation of reserves by the Federal Reserve from the creation of broad money (such as deposits) by commercial banks.
The creation of reserves
The Federal Reserve creates reserves through Open Market Operations (OMO). It buys government securities or mortgage-backed securities (MBS) from commercial banks.
In exchange, it credits the reserve accounts of those banks.
These reserves are digital entries in accounting ledgers, not physical money.
The bank ends up with more reserves and fewer securities, but its total assets do not increase. At this stage, the money supply does not increase.
The process in steps:
1) The government issues debt to cover expenses beyond revenues (i.e., the fiscal deficit).
2) Primary dealers (specialized banks acting as official dealers) purchase this debt through auctions.
3) They can then sell the bonds to other investors or to the Fed.
4) If they sell them to the Fed, the Fed credits the bank’s reserve account.
5) The bank now has more reserves but no increase in total assets.
6) On the Fed’s balance sheet, assets rise by the same amount as liabilities.
Thus, there is no “money printing”, only an asset swap.
Is the creation of reserves “money printing”?
The term “money printing” traditionally means the physical printing of money that enters directly into the economy. But today, most money consists of deposits in commercial banks, not banknotes.
As explained by the Bank of England: “When a bank issues a loan, it usually does not give out physical cash… but credits the borrower’s account with a deposit of equal value.”
In other words, money is created through lending, not by the Fed. Commercial banks create money when they issue loans.
How Broad Money (Deposits) Is Created:
When a commercial bank grants a loan:
1) It creates an asset (the loan).
2) It simultaneously creates a liability (the deposit in the customer’s account).
This new deposit increases the money supply (measured by indicators such as M1, M2, etc.).
Banks do not lend reserves, they simply must have enough to meet payments and regulatory capital adequacy requirements.
Will inflation skyrocket?
Between 2008 and 2020, the Fed massively increased reserves through Quantitative Easing (QE), yet inflation remained low.
Only when the government sent direct checks to households (that is, actually spent in the real economy) did temporary inflationary pressure emerge.
Therefore, the creation of reserves is not equivalent to increasing the supply of money circulating among the public.
It is emphasized that modern money markets rely heavily on collateral, wholesale funding, repo markets, and shadow banking. Indeed, as recognized by the Bank for International Settlements (BIS), non-bank financial intermediaries now play a major role in liquidity and credit expansion.
However, these phenomena do not negate the fundamental function of the banking system: money is created through lending.
As emphasized by Andrew Bailey (Governor of the Bank of England): “Commercial banks can create money simply by extending loans to their customers.”
1) All money is lent into existence.
2) Fed reserves do not translate into spending.
3) Growth in the money supply comes from loans and fiscal spending, not from Fed asset purchases.
4) Asset purchases (asset swaps) change the form of money, not its quantity.
In simple terms, the Federal Reserve’s “money printing” is accounting-based, not physical; it changes the form of money but not its quantity and it does not automatically mean inflation.
It remains to be seen whether, through the Federal Reserve and monetary policy, Donald Trump will confront fiscal derailment and inflationary pressures from tariffs. The raw material for an explosion of enormous proportions is already in place...
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