Fed IS THE Money Factory. Its primary purpose is to create and control money supply by advancing short term loans to its customers – usually big banks and financial institutions. After the end of the Gold standard days, (that is where the word RESERVE comes from – Gold Reserves used to act as a restraint on money supply. The paper money being a proxy for Gold) US $ is fiat currency i.e. Fed can decide to create as much $ as it WANTS. This is an awesome and dangerous task and that is why Fed is usually very conservative in its policies (trying to fight inflation over other goals).
if this will kick up inflation?
If they inject, say, $100B into a $15T economy, that is less than 1%. And that is supposed to be very short term (3 days). Hence, it can't be used to drive up demand for anything (i.e. consumption). However, if they increase the money supply much more, say more than a couple of hundred billion and keep loaning out regularly (i.e. net effect is longer time), that may cause inflation. But if Fed wants to do this, a much more convenient route is to simply lower their funds rate/discount rate. That lowers the cost of borrowing and increases money supply. Obviously, lower interest rate causes foreigners to sell off $ assets causing devaluation. That in turn causes inflation on imported goods & services. That is like exchanging one kind of pain (credit crunch – may cause recession or low growth – may increase unemployment) to another (inflation – essentially an universal tax – makes every one a little poorer)
