Final answer:
The Federal Reserve can reduce the money supply by increasing the discount rate, thereby making it more expensive for commercial banks to borrow from the Fed, and leading to a decrease in the overall number of loans available in the economy.
Step-by-step explanation:
The technique used by the Federal Reserve (the Fed) to reduce the money supply is increasing the discount rate. This is considered one of the traditional methods for conducting monetary policy. When the central bank raises the discount rate, commercial banks are discouraged from borrowing reserves from the Fed. This leads to banks calling in loans to replace those reserves, resulting in fewer loans available in the economy, reduction of the money supply, and an increase in market interest rates. It is important to note, however, that in recent decades, open market operations—buying and selling government securities—have been more often utilized as they are seen as more precise and powerful for implementing desired monetary policies.