Reviewed by Sep 28, 2020| Updated on
What is Tapering?
Tapering is the incremental reversal of a central bank's quantitative easing strategy designed to boost economic growth. As with most, if not all, economic stimulus measures, they're supposed to be unwound until policymakers are assured that the desired outcome has been achieved, usually self-sustaining economic growth.
Tapering can only come true if some kind of stimulus program has already been operated. The latest example was the US-implemented quantitative easing (QE) programme. Federal Reserve System (FRS), known as the Fed in colloquial terms, in response to the financial crisis of 2007-08.
Tapering efforts are aimed primarily at interest rates and at controlling investor perceptions of what those rates will be in the future. These may involve modifications to traditional central bank activities, such as changing the discount rate or reserve requirements or more unorthodox ones, such as quantitative easing (QE).
QE broadens the Fed's balance sheet by purchasing long-maturity bonds and other financial assets. These purchases drive down the supply available, which leads to higher prices and lower yields (long-term interest rates).
Lower yields lower the borrowing costs, which should make it easier for companies to fund new projects that generate jobs leading to higher demand and economic growth. Basically, it's a fiscal policy tool in the Fed's toolbox to stimulate the economy that will be gradually rescinded or tapered once the goal is met.
Philosophy Behind Tapering
Central banks may follow a range of growth-enhancing strategies and must match short-term economic changes with longer-term market expectations. If the central bank tapers its operations too fast, it could push the economy into recession. If it does not taper its operations, then an unwanted increase in inflation could be an offing.
It helps to set market expectations by being open with investors regarding future banking activities. That's why central banks typically use a gradual taper to loose monetary policies, instead of an abrupt stop. Central banks minimize market volatility by outlining their tapering strategy and defining the conditions under which the tapering will either start or end. In this respect, any anticipated reductions are spoken of in advance, allowing the market to start making adjustments before the activity actually takes place.
The financial sector is a segment of the economy composed of companies and institutions that provide commercial and retail customers with financial services. Read more
Electronic Payment and Receipts Framework
Electronic payments and receipts refer to payments and receipts made using digital means or technology. Read more
Cash Reserve Ratio (CRR)
Cash reserve ratio (CRR) is the amount of money that the scheduled banks will have to have in deposit with the central bank of the country at all times. Read more
Beyond a reasonable doubt is a substantive standard of proof which is required to justify a criminal conviction in most adversarial justice systems. Read more
Labour Force Participation Rate
The labour force participation rate is the portion of the working population in the 16-64 years' age group in the economy currently in employment or seeking employment. Read more
A supranational entity is an international group or alliance in which member states' power and influence transcend national boundaries or interests to engage in decision-making and to vote on collective body matters. Read more
The labour market, also known as the job market, relates to the supply and labour demand in which the supply is provided by the workers and demand by the employers. Read more
Consumer surplus is an economic indicator of the benefits to the product. Read more
Labour productivity is a measure of labour output. Read more