Fed decreases the money supply by issuing bonds at a higher interest rate. You can currently buy 1 yr govt t-bills at treasurydirect.com which return >4%. So you can either spend the money you have or tie it up for a year and make 4% on it. Also, because interest rates are higher people expect higher interest rates on any loans which decreases the purchasing power of your average borrower. This lowers purchasers demand at a given price.