Why might the Fed want to decrease the money supply?

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1. Fiscal Policy:

Fiscal Policy is the economic term which describes the behavior of governments in raising money to fund current spending and investment for collective social purposes and for transfer payments to citizens and residents of the territory for which the government is responsible. The money may be raised by taxation, by borrowing, by user charges on social assets or services, or by fiat. (On the last, the government declares a particular token to be money and demands that it be accepted in settlement of debts.) Fiscal policy can include deficit spending to stimulate demand for domestic goods and services to rise (to fight unemployment) or efforts to cut deficits or raise the budget surplus to fight inflation.

A government which wishes to borrow from foreign citizens will need to maintain accounts to allow potential creditors to assess its credit worthiness. These accounts are typically maintained on an annual basis giving rise to a fiscal year. In each fiscal year a government will have a total income (its revenue) and a total expenditure. The latter minus the former is the fiscal deficit (or fiscal surplus if negative). Year on year the fiscal deficit adds to (or reduces, in the case of "fiscal surplus") outstanding government borrowing. If government debt (sometimes misleadingly called the "national" or "public" debt) is denominated in the government's own currency, then it will be devalued in line with the country's domestic inflation. Under crisis conditions a government may choose to default on (i.e., repudiate) its foreign or, more rarely, its domestic debt.

A government will pay interest on its outstanding debt. This must be paid out of tax revenue (or compensated for by cutting expenditures). For this reason a government will typically aim to ensure that its fiscal deficit averaged over the business cycle is no greater than the share of state spending of gross domestic product multiplied by the sustainable rate of growth of gross domestic product. An exception to this rule arises when the deficit finances government investment in infrastructure, public health, basic research, or education, which can stimulate increases in potential output, i.e., long-term (supply-side) economic growth.

The government's detailed decisions in this arena form its fiscal policy..

2. Crowding out

In economics, crowding out theoretically occurs when the ...