What Is a Taper Tantrum?

The phrase "taper tantrum" describes the 2013 surge in U.S. Treasury yields, resulting from the Federal Reserve's use of tapering in its campaign to gradually reduce the amount of money it was feeding into the economy. In that case, the taper tantrum ensued when investors—panicked by the news of the impending tapering activity—rapidly pulled their money from the bond market, which consequently drastically increased bond yields.

Quantitative easing programs are not exclusively executed by the Federal Reserve in the U.S.; other central banks such as the Bank of Japan and the European Central Bank have also resorted to similar policies in an effort to kick start economic growth.

Understanding Taper Tantrums

When a crashing economy requires rescue, the Federal Reserve feeds money into the system, through a process known as quantitative easing (QE), which doles out extra cash to nearly all citizens. In theory, this lets people spend more money on consumer goods, stimulating business growth. This, in turn, boosts profits in the manufacturing sector and broadly fortifies the economy.

Quantitative easing, alternatively known as a stimulus package, is only intended to be a short-term fix. The danger arises when the Federal Reserve either feeds the economy for too long, thereby decreasing the value of the dollar, or abruptly cuts off funding altogether, triggering mass panic.

Tapering, which gradually reduces the amount of money the Fed pumps into the economy, should theoretically incrementally reduce the economy's reliance on that money. However, if the public gets word that the Fed is planning to engage in tapering, panic can still ensue, because people worry that the lack of money will trigger market instability.

What Caused the 2013 Taper Tantrum?

In 2013, Federal Reserve Chairman Ben Bernanke announced that the Fed would no longer be purchasing bonds, stirring mass global panic that resulted in drastically increased yields. 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 QE program, even though previous warnings resulted in declines in mid-2013.

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

There were many reasons for the stock market's continued health. For one, the Fed professed a strong faith in market 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 selloff had already happened, and more people were slowly warming up to the tapering program. Once investors realized that there was no reason to panic, the market leveled out.

Key Takeaways

  • Taper tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) program.
  • The main worry behind the taper tantrum stemmed from fears that the market would crumble as the result of the cessation of QE.
  • In the end, the taper tantrum panic was unjustified, as the market continued to recover after the tapering program began.

Indications of Future Taper Tantrums

As the economy recovers from the Great Recession, there has been talk of another potential taper tantrum. The Federal Reserve has begun raising interest rates, which means people will spend more on loans, and investors will speculate on whether the economy will nosedive again.

While experts are divided on whether there will be another taper tantrum, the market is nevertheless expected to react negatively, and bond yields are expected to increase—even if a full-blown taper tantrum doesn't occur.