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 in very-short-term funding markets last month suggested banks have grown reluctant to lend those reserves. Officials hadn’t said until Tuesday when they would allow reserves to grow again to avoid further scarcity issues from roiling funding markets.

“That time is now upon us,” Mr. Powell said in a speech to the National Association for Business Economics in Denver.

Mr. Powell didn’t delve into specifics, including how many bonds the Fed would buy and how quickly it would do so, but he said the Fed was close to completing and announcing its plans.

Reserves dropped to less than $1.4 trillion last month, from $2.8 trillion in 2014, when the Fed stopped buying assets. Most of the decline occurred over the past two years after the Fed pared its asset holdings by allowing some bonds to mature without replacing them.

Mr. Powell emphasized that the coming moves are aimed at maintaining a firm grip on very-short-term lending rates—and not to provide economic stimulus, as the Fed did between 2008 and 2014 by purchasing longer-dated Treasury and mortgage securities in successive campaigns sometimes referred to as quantitative easing, or QE.

“This is not QE,” Mr. Powell said. “In no sense is this QE.”

Rather than purchase longer-dated securities, Mr. Powell said officials are now contemplating buying shorter-dated Treasury bills. Officials believe holding long-term securities boosts the economy and financial markets by lowering long-term rates and driving investors into stocks and bonds. They think a portfolio weighted toward shorter-term securities provides less or no stimulus.

The Fed’s plan hasn’t been completed, but Mr. Powell suggested it would be ready by or before officials’ Oct. 29-30 policy meeting. The goal would be to rebuild the level of reserves in the system sufficiently above the low point of less than $1.4 trillion reached last month.

The Fed wants to provide enough reserves so officials can control their benchmark federal-funds rate and other short-term lending rates without the regular market intervention it has undertaken over the past three weeks, Mr. Powellhe said.

Fed policy makers set their fed-funds rate to influence a suite of short-term rates at which banks lend to each other overnight, including in the “repo” market for collateralized short-term loans. A sudden shortage of cash in this market caused repo rates to surge on Sept. 16 and 17, prompting the Fed intervention.

The repo market is an arcane but important part of the financial system. With more than $1 trillion in funding flowing through it every day, any disruptions—if allowed to fester—could influence the rates businesses and consumers pay and drag on economic growth.

Some current and former Fed officials think the easiest fix to recent money-market volatility would be to build a buffer of reserves $150 billion or $250 billion above mid-September’s low watermark by buying Treasury securities.

Market analysts said Mr. Powell’s comments clarified ambiguity around the Fed’s mid- and long-range plans. “This was a helpful announcement today, allowing investors to focus on the actual rate decision/guidance provided in three weeks rather than mechanics,” said Jim Vogel, an interest-rate strategist at FTN Financial.

Mr. Powell provided fewer clues Tuesday about the possibility of another interest rate cut this month. The Fed lowered the fed-funds rate in September to a range between 1.75% and 2%, its second rate cut this year.

A recent spate of weak factory data and other signs of a slowdown have helped to fuel market expectations of another cut in October.

Mr. Powell neither rejected nor ratified market expectations of another cut. He acknowledged recent risks to growth from uncertainty over trade policy and other global developments and said recent Fed rate cuts had buoyed the U.S. economic outlook.

The Fed’s next policy meeting is several weeks away “and we will be carefully monitoring incoming information,” Mr. Powell said.

Economic data last week pointed to signs of a continued slowdown in the pace of job growth but arrested worries of a sharp downturn. Mr. Powell said recent labor market data has been solid, with the slower pace of job gains still strong enough to accommodate new workers entering the labor force.

During a question-and-answer session, Mr. Powell offered one sign of how market signals could shape his thinking. Despite the Fed’s two rate cuts this year, long-term bond yields in recent months have held below short-term yields, a phenomenon known as an inverted yield curve that has traditionally preceded downturns by a year or so.

“It’s not something that you need to deal with immediately, but it…wouldn’t be comfortable to be in that state of affairs for an extended period of time,” he said.

Write to Nick Timiraos at nick.timiraos@wsj.com