The Fed is selling Treasury securities on behalf of the Federal government, so these sales do not directly affect the Fed's balance sheet.
The Fed does purchase Treasury securities from Primary Dealers (really big banks) every so often through "POMO's" (Permanent Open Market Operations). They just bought over $6 billion yesterday.
The purchase yesterday meant that the Fed created $6 billion "out of thin air" to give to a Primary Dealer (someone like Goldman Sachs).
The Primay Dealer receives a credit to their Fed account for $6 billion - which they are currently using to artificialy prop up the equities markets (yes, this "rally" is a fraud).
The Fed receive $6 billion of Treasury securities from the Primary Dealer in return. This counts as a $6 billion asset on the Fed's balance sheet.
Balance sheets must stay "in balance" - meaning their has to be a $6 billion liabiity created. In the past, the Fed has increased "excess reserves" (a liability) to the Primary Dealers to offset the asset purchase. This is how they're able to purchase hundreds of billions of Mortgage-backed securities and still keep their balance sheet intact.
The Fed has taken a different direction with their Treasury security purchases. They have decreased their "currency swap" assets by the same amount in order for things to even out. This means that foreign countries now have fewer U.S. dollars being "swapped" for their currency, which can affect international trade since most of it is done in dollars.
To make a long story longer, the Fed carries a liability entry on their balance sheet that is "currency in circulation". This number has not gone up very much since early last year.
It is impossible to have major inflation unless the amount of currency circulating in the economy goes way up - it hasn't.
There is a danger that big banks could begin using their "excess reserves" to fund loans. This would definitely drive inflation, since it would cause more money to circulate.
However, the Fed is currently paying interest on those excess reserves that discourages big banks from lending it out into the economy - or even lending it to other banks as an overnight loan.
Aren't you sorry you asked? ;-)
Do you mind if I ask your background? Interesting.
“However, the Fed is currently paying interest on those excess reserves..”
Since when? I mean, yeah during most of history it has, but the last I heard, the Fed cut the rate to 0%.