The gradual reduction in the pace of a central bank's asset purchases under a quantitative easing program, signaling a transition from stimulus toward policy normalization.
What Is Tapering?
Tapering refers to the gradual slowdown of Quantitative Easing purchases before they stop entirely. Rather than abruptly ending bond buying, a Central Bank tapers by reducing its monthly purchase amounts over several meetings. For example, the Federal Reserve might reduce purchases from $120 billion/month to $105 billion, then $90 billion, and so on until reaching zero.
The "Taper Tantrum" and Forex
Tapering gained notoriety in 2013 when Fed Chair Ben Bernanke merely mentioned the possibility of reducing QE, triggering the "Taper Tantrum." Bond yields spiked, emerging market currencies plunged, and volatility surged across all asset classes. This episode demonstrated that even the anticipation of tapering, not the action itself, can move forex markets dramatically. USD strengthened as markets priced in less future easing.
Trading Taper Signals
Tapering sits between full QE and Quantitative Tightening on the policy spectrum. Its announcement is typically Hawkish for the domestic currency because it signals the end of maximum stimulus. Key signals include Central Bank language shifting from "maintain pace" to "begin reducing," and employment or Inflation data meeting the central bank's stated thresholds for tapering. Once tapering begins, markets focus on the pace and whether it might accelerate or slow, each adjustment affecting currency direction.
Related Terms
Quantitative Easing
An unconventional monetary policy where a central bank purchases government bonds and other financial assets to inject money into the economy, lower long-term interest rates, and stimulate growth.
Quantitative Tightening
The process of a central bank reducing its balance sheet by allowing bonds to mature without reinvestment or actively selling assets, effectively withdrawing money from the financial system.
Forward Guidance
A central bank communication strategy where policymakers signal their expected future monetary policy path, helping markets anticipate interest rate changes and reducing uncertainty.
Central Bank
A national or supranational institution responsible for managing a country's monetary policy, controlling the money supply, setting interest rates, and maintaining financial stability.
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