DEFINITION of 'Taper Tantrum'
Taper tantrum is the term used to refer to the 2013 surge in U.S. Treasury yields, which resulted from the Federal Reserve's use of tapering to gradually reduce the amount of money it was feeding into the economy. The taper tantrum ensued when investors panicked in reaction to news of this tapering and drew their money rapidly out of the bond market, which drastically increased bond yields.
BREAKING DOWN 'Taper Tantrum'
When the economy needs a boost or is on the verge of crashing, the Federal Reserve feeds money into the system through quantitative easing (QE), which gives everyone extra money. This allows people to spend more money, which boosts businesses, which, in turn, boosts manufacturers, and the economy as a whole experiences a boost. This is commonly known as a stimulus package.
QE is only intended to be a short-term solution. The danger comes when the Federal Reserve either feeds the economy for too long, which lessens the value of the dollar, or cuts it off abruptly, which causes mass panic. Tapering is a system of slowly reducing the amount of money the Fed puts into the economy, which, in theory, gradually reduces the economy's reliance on that money. However, if the public hears that the Fed is planning to engage in tapering, panic can still ensue; that panic is called a taper tantrum.
What Caused the 2013 Taper Tantrum?
Tapering can backfire and causes a taper tantrum when investors hear about the Federal Reserve's reduction of money into the economy and view it as an indication that the market will be unstable without these extra funds. In 2013, Federal Reserve Chairman Ben Bernanke announced that the Fed would no longer be purchasing bonds, and mass global panic ensued. Bond yields drastically increased. However, once investors realized that there was no reason to panic, the market leveled out again.
Indications of Taper Tantrums in the Future
As the economy recovers from the Great Recession, there has been talkof another potential taper tantrum. The Federal Reserve plans to continue raising interest rates, which means people will spend more money on loans and investors will speculate on whether the economy is moving toward another recession. There is controversy over whether or not a taper tantrum is expected, as experts are divided on the issue. Regardless, the market is expected to react negatively, and bond yields are expected to increase, even if a full-blown taper tantrum doesn't occur.