The Federal Reserve decreases the money supply by:
1. Increasing interest rates: By raising the federal funds rate, the Federal Reserve makes it more expensive for banks to borrow money from the central bank. This can lead to a decrease in lending and ultimately reduce the overall money supply in the economy.
2. Selling government securities: The Federal Reserve can also sell government securities, such as Treasury bonds, in open market operations. This reduces the amount of money available to banks and the public, leading to a decrease in the money supply.
3. Increasing reserve requirements: The Federal Reserve can also require banks to hold a higher percentage of their deposits as reserves. This limits the amount of money available for lending and can restrict the growth of the money supply.
4. Issuing reverse repurchase agreements: The Federal Reserve can enter into reverse repurchase agreements, where it sells securities with an agreement to repurchase them at a later date. This temporarily removes money from circulation and decreases the money supply.