[MonetaryPolicyFilter] In relation to the Fed's huge injection of money yesterday, please explain to me how, if at all, the Federal Reserve can
money on its balance sheet in a way that offsets the inflation that normally would result.
The Fed's announcement yesterday that is it going to flood the economy with dollars
would, in normal circumstances, be horrifically inflationary. But these are not normal normal circumstances. My questions are:
1) Why isn't this inflationary? To what extent have deflationary factors stemming from the credit crisis not yet worked their way into the economy such that they will offset what inflation results?
2) Explain Federal Reserve accounting to me. I sort of understand that the Fed can create this $1 trillion from basically thin air, but can it destroy money just as easily as it creates it?
3) Because the Fed is buying debt and debt-related instruments, can the Fed take the principal and interest payments it receives from these debtors (e.g. the U.S Treasury), and destroy that money just as easily as it created that money? In other words, when Treasury makes interest payments to the Fed on the bonds the Fed bought, can the Fed simply take that money and strike or "disappear" it from it's balance sheet forever?
4) If the Fed can do what is described in (3), is that the mechanism the Fed intends to use to avoid inflation that would normally result from such a huge injection of money? Has the Fed said anything about what it intends to do with the interest payments it receives?
5) Any resources related to Federal Reserve accounting or explanations of how its balance sheet works would be greatly appreciated.
I'm looking for accurate financial answers here, not lunacy or chatfilter. Thanks in advance for your help.