Tapering

Tapering is the gradual reduction in the pace of asset purchases by a central bank, typically marking the end of quantitative easing (QE) programs. When a central bank tapers, it buys fewer bonds and other assets each month, slowly withdrawing monetary stimulus from the economy.

What Tapering Means

Central banks like the Federal Reserve (Fed) and European Central Bank (ECB) use quantitative easing to inject liquidity into the economy during crises or when inflation is low. Tapering signals that economic conditions have improved enough to reduce this support. The bank continues buying assets, but in declining amounts, eventually phasing out purchases entirely before moving to interest rate increases.

Why Central Banks Taper

Tapering typically occurs when the economy strengthens or inflation becomes a concern. Prolonged QE can inflate asset bubbles and fuel price increases, so central banks reduce support to prevent overheating. However, the transition must be carefully managed to avoid market shock.

Market Impact

Tapering announcements often trigger significant market moves. When the Federal Reserve announced tapering in 2013 (the "Taper Tantrum"), bond yields spiked sharply and emerging market assets sold off. Higher yields and reduced liquidity can strengthen the currency of the country doing the tapering but can hurt emerging markets that relied on cheap dollars flowing in during the QE period.

Tapering vs. Interest Rate Hikes