I was once offered a job by the Fed…very glad I didn’t take it, but walking into a vault full of cash was cool.
It’s been awhile since i studied this…Presses aside, the fed does have significant holdings of U.S. treasury securities. If it wants to “mop up” liquidity, it sells them, thus taking cash out of the market.
I assume that creating liquidity is just the opposite, and effectively, the fed can “crank up the presses” by buying treasuries. This would only lead to inflation if the dollars stayed out there-presumably the repos the fed has offered lately will be closed out and the excess liquidity created will be put back into the fed accounts (effectively destorying the cash earlier printed if you will).
I assume someone else here can give a better explanation than that, but that’s my recollection of how it works.
