The Federal Reserve is discussing tapering, or slowing down the loose monetary policiy of bond purchases (quantitative easing).
The Federal Reserve has started dropping hints it’s going to begin tapering the quantitative easing that has been going on since March 2020 in response to the COVID-19 pandemic and subsequent economic shutdown.
Tapering is the process when the Federal Reserve reduces Quantitative Easing (QE) and begins scaling back their asset purchase program. By gradually backing off or ending their asset purcase program by the middle of 2021, they would avoid disrupting financial markets.
The taper tantrum refers to the reaction of financial markets to the Fed’s announcement in 2013 that it might begin to scale back the pace of its asset purchases. The taper tantrum was an indicator that markets had become far too dependent on the Fed’s stimulus for their financial well-being and were addicted to its easy money / loose monetary policy.
Reducing bond purchases could provide more flexibility for the Fed to raise interest reates if inflation stays high within the economy and unemployment continues to fall.
No one know for sure how the market will response when the Fed slows Quantatative Easing. The fear of Wall Street is that the Fed could begin tapering much faster than had previously been expected.
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