> It seems like there would be more deflationary pressure if they just didn't lend to the banks....It sounded like the idea is that they will create new money to cover these losses later, when price inflation gets back down below the target.

Yes, its a weird one to wrap my head around. The lender of last resort is now borrowing from "whom"?

freetx

That was my first thought when someone posted about this earlier in the week. I'm not actually sure if this is money destruction though. 

The Fed is running a negative capital balance, in order to continue lending to banks. It seems like there would be more deflationary pressure if they just didn't lend to the banks.

It sounded like the idea is that they will create new money to cover these losses later, when price inflation gets back down below the target.

Undisciplined

econ

Fed Admits Losing $114 Billion

k00b

I would add, money destruction is the best way to reduce inflation.  Therefore, perhaps this is a feature-by-design and not a bug.
