Question

why does the federal reserve reduct physical curreny during high interest rate and potential inflation?

Answer 1

Federal Reserve will be reducting physical currency during high interest rate and potential inflation because it wants to curb out the inflation rate and level of demand into the economy,so it will be trying to absorb all the additional liquidity in the market by reducting out the physical currency which will be helping in reducing the level of demand because when there will be a higher demand into the market, it would be a leading to higher inflation in the market and Federal Reserve is known for controlling the level of the monetary demand and monetary supply in the economy in order to establish a stable monetary flow, so it would be trying to reduct physical currency in order to control with the demand and supply levels of currency in the entire economy so that people will be left with lesser amount of money in the market and they will be left with low demand because they would not be having higher disposable currencies.

This is a method of slowing down the monetary flow because when there would be less physical currency in the operation& it would be leading to a lower level of demand into the economy and it would be leading to controlling the demand by the Federal Reserve to a large extent because it will be helping in lowering down the inflation as well so Federal Reserve would be able to curb down the excess level of demand by soaking out the Liquidity into the economy.