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Comment by Areading314 | Hacker News Reader

If the Fed "loses" money by buying high and selling low, it means dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for. This creates permanent inflation/dilution of the currency.

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> dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for

Open market operations are one among many of the Fed's policy tools [1].

[1] https://www.frbsf.org/education/teacher-resources/what-is-th...

These are debt instruments. If the Fed buys UST, MBS, etc from the market, those assets will be serviced over time and the money will return to the Fed.

> those assets will be serviced over time and the money will return to the Fed

The comment I responded to [1] posited the Fed needing to engage in extraordinary tightening. Waiting for the debt to be repaid would be insufficient in that case. (Also, defaults unbalance the equation.)

In that case, the Fed would need to sell assets to draw cash out of the economy. My point was that if the Fed ran its balance sheet to zero, it would still have unlimited firepower in the form of slashing interest on reserves through zero, borrowing through repos and potentially even raising the reserve requirement. These are powerful tools. Too powerful for regular use, which is why the more-precise open market operations are preferred.

TL; DR Running out of room to tighten is not a problem for a central bank.

[1] https://news.ycombinator.com/item?id=31428385

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