Tapering
The gradual reduction in the pace of a central bank's asset purchases — a step toward tightening that precedes rate hikes and signals the end of QE.
Tapering refers to a central bank gradually reducing the monthly volume of asset purchases under a QE program. Rather than an abrupt halt, tapering is a phased wind-down that signals the central bank is becoming more comfortable with the economic outlook and is moving toward tighter policy.
Tapering is a pivotal event because it is the first step away from accommodation and precedes rate hikes. The 2013 "Taper Tantrum" — when Fed Chair Bernanke merely suggested the possibility of tapering — caused a sharp selloff in bonds and EM assets, illustrating just how sensitive markets are to the announcement itself.
Example
In November 2021, the Fed announced it would reduce monthly asset purchases by $15B per meeting. Bond yields rose, the dollar strengthened, and EM equities underperformed as global dollar liquidity peaked.
Related Terms
Bond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerFederal Reserve
The U.S. central bank — its rate decisions and forward guidance move global markets more than any other single institution.
BeginnerMonetary Policy
Central bank actions — rate changes, asset purchases, reserve requirements — designed to control inflation and support employment.
BeginnerMoney Supply
The total stock of money in circulation — tracked via M1, M2, and M3 aggregates — a key input to inflation and liquidity analysis.
IntermediateQuantitative Easing (QE)
A central bank's large-scale asset purchases that inject liquidity into the system and push down long-term interest rates.
IntermediateQuantitative Tightening (QT)
A central bank's deliberate shrinkage of its balance sheet by allowing bonds to mature without reinvestment, draining liquidity from the system.
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