Of late, there have been widespread speculations from various quarters that the US Federal Reserve has plans to decrease the money supply by draining out nearly one trillion dollars from the financial system to prop up its own balance sheet. The Fed will do this by selling one trillion dollars worth of reverse repurchase transactions or reverse repos to the bond dealers. This could be one effective way of decreasing the money supply, to stimulate the economy.

Discount rates are rates at which the banks borrow money from the Fed to carry on with their everyday activities. This can be tweaked by the central bank to decrease the money supply. The Fed can also increase the discount rates to discourage the banks to borrow money from it. This, in turn, would mean lesser loans and consequently decreased money supply and circulation in the economy. Another tool the Fed adopts to decrease money supply is by changing the Fed funds rate. This is the rate of interest that banks charge each other for overnight loans of reserve balances.

The Fed could increase the Fed funds rate thus directly affecting the short-term interest rates like bank deposits, credit card interest rates, bank loans and the adjustable-rate mortgages. With an increased Fed funds rate the banks are forced to lessen lending and resulting in removing the excess money supply in the economy. 

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