The Reds sent Williams on a development loan this summer to Championship club Blackpool and the player has made 17 outings for the Tangerines.
However, the centre-back has featured only once in his last five Championship games, losing his spot in the starting line-up.
Liverpool have decided to recall Williams to Anfield and want to add him to their first-team squad.
It has been claimed that the return of Williams could also make possible the departure of Phillips in this month’s transfer window.
Phillips, 25, has been restricted to just seven appearances this campaign, the most recent of which came as a substitute in the FA Cup third round replay against Wolves last week.
Jurgen Klopp’s side would be prepared to listen to both loan and permanent offers for Phillips when Williams returns to Anfield.
It remains to be seen whether there will be any takers for Phillips before the January transfer window ends.