Tapering

Definition of 'Tapering'


A gradual winding down of central bank activities used to improve the conditions for economic growth. Tapering activities is primarily aimed at interest rates and investor expectations of what those rates will be in the future. These can include conventional central bank activities, such as adjusting the discount rate or reserve requirements, or more unconventional ones, such as quantitative easing (QE).

Investopedia explains 'Tapering'


Central banks can employ a variety of policies to improve growth, and they must balance short-term improvements in the economy with longer-term market expectations. If the central bank tapers its activities too quickly, it may send the economy into a recession. If it does not taper its activities, it may lead to high inflation.

Tapering is best known in the context of the Federal Reserve's quantitative easing program. In reaction to the 2007 financial crisis, the Federal Reserve began to purchase assets with long maturities to lower long-term interest rates. This activity was undertaken to entice financial institutions to lend money, and it began when the Federal Reserve purchased mortgage-backed securities. In 2013, Ben Bernanke commented that the Federal Reserve would lower the amount of assets purchased by the Fed each month if economic conditions, such as inflation and unemployment, were favorable.

Being open with investors regarding future bank activities helps set market expectations. This is why central banks typically employ a gradual taper rather than an abrupt halt to loosen monetary policies. Central banks reduce market uncertainty by outlining their approach to tapering, and under what conditions that tapering will either continue or discontinue.



comments powered by Disqus
Hot Definitions
  1. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  2. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  3. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  4. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  5. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  6. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
Trading Center