Q&A: What is tapering?

This was driven by the Fed’s original goal of calming a distressed Treasury market in March and April 2020. Tapering is a term used in finance to describe a reduction of monetary stimulus provided by central authorities to the capital markets. In June 2022, the Federal Reserve changed its monetary policy direction to manage the threat of rising costs. The Fed revised its position after two bitstamp review years of an “easy money” policy, ending its policy of low-interest rates and significant intervention in the bond market. Tapering is the gradual reversal of a series of policies that a central bank has hitherto implemented on an emergency basis to stimulate economic growth. That was followed by Operation Twist, where the Fed bought longer-term assets while selling shorter-term securities.

1. But by the end of that year, the losses had recovered, with the S&P 500 up 9.92%, the Dow up 9.56%, and the NASDAQ up 10.74% in the fourth quarter of 2013.
2. Tight monetary policy, or contractionary policy, refers to a course of action a central bank utilizes to restrain an overheated economy and reduce high inflation.
3. Tapering the QE programs and the potential to raise interest rates by central banks worldwide will be the most important news that has dominated the currency markets for a long time.
4. The Fed’s motivation for tapering is to slowly remove the monetary stimulus it has been providing the economy.
5. Tight, or contractionary policy is a course of action by a central bank to slow down economic growth, constrict spending in an economy that is seen to be accelerating too quickly, or curb inflation when it is rising too fast.
6. In June 2022, the Federal Reserve changed its monetary policy direction to manage the threat of rising costs.

This helped to maintain low loan rates and also increased liquidity in the economy, assuring investors of a brighter future. The impacts of the taper tantrum on the U.S. economy were relatively mild, with https://forex-review.net/ the economy growing at a rate of 2.6 percent in 2013 (on a Q4/Q4 basis) despite fiscal as well as monetary tightening. The Fed implements quantitative easing as one of its tools to stimulate the economy.

Muted Response of the Markets

Fed Chair Powell, a member of the Board of Governors of the Federal Reserve during the earlier taper, said in March 2021 that the central bank would “supply clear communication” well in advance of the actual tapering. During his press conference on Nov. 3, 2021, Fed Chair Powell insisted that, despite tapering, the Fed’s stance will remain “accommodative,” still seeking to keep interest rates near zero. “It would be premature to raise rates now,” he said in response to a subsequent question about inflation.

What is Tapering?

This is due to the fact that it is both the most significant and the least common monetary policy in existence today. A long-lasting and significant impact on a range of economic parameters will result from how this policy’s ramifications play out. Central banks have a variety of growth-enhancing tools available to them, and they must reconcile short-term economic trends with longer-term market expectations.

Overall, the large-scale asset purchases that took place during and after the global financial crisis had powerful effects on lowering 10-year Treasury yields. While the reduction in asset purchases will have a direct impact on the prices or yields of those assets, the bigger implication is what it signifies for the timing of the Federal Reserve hiking policy rates. These tapering announcements have typically resulted in sharp rises in government bond yields, yield curve distortions, and equity market sell-offs. Hence, policymakers are very careful about the timing, pace, and scale of tapering plans.

Stocks Perform Better When Interest Rates Rise

Long-term bond yields are determined by a range of factors, including expectations for growth, inflation and the path of interest rates. Central bankers are keen to point out that tapering does not represent a tightening of monetary policy. The Fed has indicated that a rate hike is unlikely before asset purchases are completed, and has tried to weaken the ‘signalling’ effect that tapering might have on interest rate expectations.

Why Do You Need to Know About Tapering?

Tapering can impact long-term interest rates through both its direct effects on bond markets and the signal it provides about the Fed’s future policy intentions. We also have the Nordic economies of Norway and Sweden, where the economies have done very well in coping with COVID-19. The Norges Bank is expected to start tightening monetary policy, and the Norges Bank’s Governor has already announced that there could be up to 4 rate hikes in 2022. Some banks are already looking at the EUR/NOK pair in this regard, as the European Central Bank (ECB) has made it clear it is in no hurry to end its Pandemic Emergency Purchase Program (PEPP).

The Fed’s primary goal is to keep the U.S. economy operating at peak efficiency. Thus, its mandate is to enact policies that promote maximum employment while ensuring that inflationary forces are kept at bay. Inflation refers to the monetary phenomenon where the prices of goods and services in the economy rise over time.

In contrast, the 2013 ‘taper tantrum’ was in part attributable to the markets rapidly bringing forward expectations for the timing of rate increases. In recent weeks, markets have moved to price in a rate hike for the second half of 2022 as Fed officials have become more hawkish 7, but the process has been relatively orderly. Tapering not only means the end of the central banks’ expansionary policies, it also signals the eventual onset of monetary tightening. That, for one, means higher interest rates on mortgages, consumer loans, and business borrowing.

Growing concerns among economists that rising inflation could harm the economy are likely a big part of what led the Fed to begin tapering. As desirable as quantitative easing in preventing such economic disasters, it comes at a considerable cost and is ultimately not sustainable over a long period. The caps will be set at $30 billion per month for Treasurys and $17.5 billion per month for mortgage-backed securities (MBS) for the first three months.

Specifically, according to guidance the Fed issued in December 2020, tapering was to begin once the economy had made “substantial further progress” toward its goals of maximum employment and price stability. In the two years following the onset of the pandemic in early 2020, the Fed bought over $4.5 trillion in Treasury and mortgage-backed securities. These bond purchases differed in composition from the Fed’s earlier QE programs. While previous rounds of QE primarily involved the purchase of longer-term securities, during the pandemic, the Fed purchased Treasuries across a broader range of maturities.

Continuing to stimulate an economy with easy money once a recession has eased can lead to inflation and monetary policy-driven asset price bubbles. Whenever there is a stimulus program in place by a central bank, the supply of the local currency is increased. By the laws of demand and supply, a higher supply of an item diminishes the value.

Essentially, it is the term used to describe the process whereby the asset purchases implemented by QE are gradually cut back. Typically, this entails reducing the amount of maturing bonds being repurchased by the Fed until it is down to zero, at which point any further reduction becomes QT. Both methods of implementing QT would increase the supply of bonds available in the market. The main focus is on reducing the amount of money in circulation to contain the escalating inflationary forces. When the Fed slows its asset purchases, the number of bonds available on the market increases, which brings down bond prices, making bonds more attractive than stocks. In debt markets, bond prices dipped, and yields rose as investors started to sell their bonds.

The foremost reason is that the markets expected the taper that began in November 2021, so a knee-jerk reaction as seen in 2013 didn’t occur. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.