Sewell Chan writes about the possibility of inflation and 1970s-style stagflation:

If banks were to withdraw the $1 trillion they hold at the Fed too quickly, it could generate inflation. Moreover, Mr. Walsh said, "changes in expectations about future inflation can influence current inflation, even if the economy is below its potential"

In the worst case, he said, the economy could return to the stagflation of the late 1970s, when prices rose as growth lagged.

Dean Baker comments:

[Walsh] warned that if banks suddenly withdrew the $1 trillion in reserves that they held at the Fed it could generate inflation.

While this is in principle possible, it would have been worth noting the mechanism through which inflation would be generated. The banks would have to lend out the money to firms who invest it, thereby increasing employment. This would lead to more jobs, higher wages, and then higher demand, which would allow firms to be able to raise prices.

This process takes time. The Fed would have ample opportunity to raise interest rates and slow growth before inflation got too high. Most people would probably be willing to take the risk that the economy might jump back to full employment too quickly.

Stagflation in the 1970s was a result of many different things, although economists don't seem to be in complete agreement on what caused stagflation. During that period there as an oil supply shock, the Vietnam War, the fall of the Bretton Woods system, increased competition from Germany and Japan which triggered a steel crisis, and unions were much stronger. Something Krugman points out about unions in the 1970s is that they were powerful enough to negotiate wage increases to keep up with price increases even as growth stalled. Unions no longer have that ability on the same scale.