What is taperingWhat is tapering? In finance, tapering refers specifically... More?
In finance, tapering refers specifically to the anticipated reduction of quantitative easing (QE) – the US economic stimulus buying programme – with a view to potentially winding it down completely.
Quantitative easing background
The financial crisis of 2008 prompted the to use stimulus measures to kick-start the US economy and keep low. The stimulus was never intended as a permanent solution.
The term ‘tapering’ was first used in a financial sense in May 2013 by Federal Reserve Chairman Ben Bernanke, when he indicated in a statement that if the US economy recovered as expected, stimulus measures such as QE would start to be reduced.
The financial press quickly started using the term too and the issue of when tapering would start, and to what extent, became a widely reported topic with a powerful impact on .
Market reactions to anticipated tapering
Tapering is by its nature gradual (it literally means to ‘lessen’, ‘decrease’ or ‘reduce’), but even the slightest reduction in economic stimulus can have a big impact on markets.
And although the term tapering is specific to the US and the Fed’s pullback on quantitative easing, a reduction in stimulus by any major economy would have an impact on a broad range of .
Uncertainty about when or if a government will start tapering off any stimulus will tend to increase in markets as try to predict when and by how much any supportWhat are "support levels" in trading? A support level is a... More will be withdrawn.
If that economic stimulus has taken the form of buying – as in the US – bond prices may fall sharply as investors pull out of that market. This could push up and, because companies’ lending costs will rise, drive down .
prices are sometimes pushed up by economic stimulus – especially if it takes the form of moneyMoney is a generally accepted medium of exchange to buy and... More printing – so news of any pullback may cause prices to fall sharply. In recent years, however, goldGold is a precious metal and an important financial commo... More prices have tended to rise when the global economy faces risk, and fall when that risk appears to go away, so that relationship is no longer so simple.
markets are also very sensitive to tapering talk. In the case of the US, quantitative easing made the cheaper against the currencies of many emerging markets, such as the Indian rupee and Brazilian real. Tapering talk therefore caused the values of those currencies to suddenly weaken.
