[blusterXY]

They would do the opposite of quantitative easing: jack up the Federal Funds rate and reverse open market operations to pull liquidity away from banks. Higher interest rates would encourage people not to dump USD, while also counterbalancing the cheap-money boom created by the influx of USD.

If the influx of USD was higher and faster than could be addressed, the economy would naturally get inflation that would force interest rates even higher up (since no banks will lend at a loss, so borrowing costs get pushed up first by the fed, and then by the need to cover for expected inflation). This would be a death blow to many indebted and highly-leveraged businesses that are dependent on low interest rates for operational purposes (including those in the financial sector) and so they would go out of business. The need for the financial system to write-off the debt held by these companies would also eliminate a certain amount of money in circulation. Eventually enough money has been destroyed/absorbed and the economy is back in equilibrium.

On a less than academic note: this is not a totally unlikely scenario since the flight-to-crypto is a de facto process of de-dollarization, with crypto assets essentially replacing fiat both as store of value as well as medium of exchange. Put another way, the increase in the value of cryptocurrencies is really just a loss in the purchasing power of everyone holding fiat, and since these additional assets are now competing to purchase the same pool of goods, what people think of as bubbles in assets like housing are really just reflective of inflation in the underlying supply of money-that-can-buy-things. And it will get worse when you can sell your house for crypto.