DENVER—The Federal Reserve will soon increase its purchases of short-term Treasury securities to avoid a recurrence of the unexpected strains experienced in money markets last month, Fed Chairman Jerome Powell said Tuesday.

Fed officials stopped shrinking the assets on their balance sheet in August but never said when they would allow the balance sheet to grow again. As a result, a crucial liability on the balance sheet—bank deposits held at the Fed, called reserves—has continued declining.

Stresses...