What is the 'Taper Tantrum'

Taper tantrum is the term used for 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.

But Why Didn’t the Stock Market Fall During the Taper Tantrum?

Many pundits believed that the stock market would plummet when the Fed announced it would scale down its bond-buying program in 2013. Instead, the Dow Jones Industrial Average (DJIA) made gains following the first signs of the the QE program, even though previous warnings resulted in declines in mid-2013. Some of the reasons the stock market didn’t necessarily follow the warnings include that there was overall mood in the Fed’s faith in recovery. Secondly, there was a sense that the tapering would reduce uncertainty in the economy, eliminating shock while tightening the conditions slowly. Furthermore, much of the sell-off already happened, and more people were buying into the news of the tapering by the government. 

Indications of Taper Tantrums in the Future

As the economy recovers from the Great Recession, there has been talk of another potential taper tantrum. The Federal Reserve has started to raise 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 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.

RELATED TERMS
  1. Panic Buying

    Panic buying is a type of behavior marked by a rapid increase ...
  2. 1913 Federal Reserve Act

    The 1913 Federal Reserve Act was U.S. legislation that created ...
  3. FED Pass

    A Fed pass happens when the U.S. central bank increases the availability ...
  4. Federal Reserve System - FRS

    The Federal Reserve System, commonly known as the Fed, is the ...
  5. Federal Reserve System

    The Federal Reserve System is the central bank of the United ...
  6. Fed Balance Sheet

    The Fed balance sheet is the U.S. Federal Reserve System's balance ...
Related Articles
  1. Investing

    What Will Happen To Treasury Yields With Yellen And Tapering?

    Janet Yellen was sworn in as Federal Reserve chair Feb. 3, 2014, ending Ben Bernanke's eight-year tenure. Yellen assumes her role at a time when the economy is its strongest since the recession ...
  2. Investing

    Why Isn't the Bond Market Selling Off?

    From quantitative easing to quantitative tightening. Why aren't bond prices moving lower?
  3. Insights

    Bank Stocks Set to Shine as Fed Tapering Begins

    As the Fed embarks on a monumental shift in policy, Goldman Sachs sees value in financials.
  4. Insights

    How Federal Open Market Committee Meetings Drive Rates And Stocks

    Janet Yellen's first Federal Open Market Committee (FOMC) meeting - and its aftermath - is an important bellwether for the immediate future of the U.S. economy.
  5. Investing

    Playing The Boom In Net-Lease REITs

    With the Fed’s taper tantrum sending many REITs into the basement, the time to buy could be on. And the triple-net players could be some of the best bargains
  6. Insights

    Potential Impact of Fed’s Balance Sheet Reduction

    The Fed has started to unwind its balance sheet. Here's what that means and the potential impact.
  7. Trading

    Quantitative Easing Report Card in 2016

    Find out why quantitative easing has not worked, despite the best efforts of the Federal Reserve, and how it has fueled the national debt problem.
  8. Insights

    Quantitative Easing is Now a Fixture, Not a Temporary Patch

    Rather than being a temporary patch, QE (quantitative easing) is now a fixture in global economic policy, for good or for bad.
  9. Investing

    How Yellen's Fed Could Jolt the Markets

    The Fed's plan to slash its $4.45 trillion portfolio risks jolting the bond and mortgage markets
  10. Investing

    Mortgage Rates To Rise, But When And By How Much?

    Mortgage rates have been at historical lows since 2008 following the financial crisis. They're expected to rise, but when and by how much?
RELATED FAQS
  1. How does quantitative easing in the U.S. affect the bond market?

    See why it is very difficult to evaluate the impact of the Federal Reserve's quantitative easing, or QE, program on bond ... Read Answer >>
  2. How does quantitative easing in the U.S. affect the stock market?

    Read about the impacts of quantitative easing, or QE, on prices in the stock market, and learn some of the possible implications ... Read Answer >>
Trading Center