Short and long term interest rates in this case are for US Treasury Bonds that mature at different lengths of time. Short term bonds tend to have lower interest rates since you're taking less risk that your money will be tied up when the economy grows at a faster pace. If you invest in long term bonds and the economy hits a growth spurt, your money is stuck for a much longer period of time earning less interest than if you had invested in something other than that bond.

Edit: Missed the first question in your post. The Federal Reserve is essentially buying fewer Treasury Bonds when the bonds it currently holds matures. Instead of reinvesting the payoff + interest that it received for those bonds, it is now just taking that money and essentially keeping it out of circulation.