Tapering
  
Tapering is QE in reverse. (Not EQ; that's the thing you do with your car stereo to make the bass really annoy people at stoplights.)
Back up. What’s QE? QE = Quantitative easing, which is when a central bank buys government securities back from the market and banks to increase the money supply, encouraging lending and investing to stimulate the economy. Got it? Got it.
Tapering, like QE, is a slow process, like drip coffee. Drip. Drip. Drip.
The central bank (the Fed in the U.S.) buys government securities from the market at a slower rate, decreasing its bond-buying QE program and slowly winding down the money supply. If done too fast or at the wrong time, tapering could lead to a whoopsies recession. If done too late, it’ll just lead to inflation.
With the risks of messing up tapering, why bother? Well, quantitative easing is a tool for when the economy is down. In order to have QE available to use as a tool when it’s needed, a central bank needs to have government securities to buy back...and if it already bought them all from the last QE, the tool is unavailable.
Think about it like a lifeguard with a buoy: the lifeguard throws it out to help. If he wants to throw it out again next time, he needs to reel the buoy back first.
When the 2007-2008 financial crisis shocked the U.S. (and, um, the world), the Fed bought government securities back, increasing the money supply, as part of the government’s economic stimulus package. In order to use QE again in the future as an economic buoy, the Fed needed to reel that buoy back in via tapering.
They did in 2013, lowering the amount of securities purchased each month...as long as inflation and unemployment rates didn’t seem to notice too much. The Fed doesn’t want to cause another financial panic, so proceeding in a slow and steady manner, watching inflation and unemployment, is key to tapering like a pro.
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Finance: What is The Fed?1 Views
and finance Allah shmoop What is the Fed shmoop the
Fed A k a The Federal Reserve It's the central
bank of the United States and its independent of the
three branches of U S government and it's also responsible
for well the health of America's financial system More less
An apple a day keeps the USD looking a OK
by setting the country's monetary policy regulating financial institutions and
acting as a bank for the U S Treasury What
the Fed is central to the US economy and well
to the strength of the dollar You probably heard of
the Fed chair He's sometimes in the news since he's
well more or less the face of the Fed For
instance Ben Bernanke got a lot of screen time whether
he liked it or not since he was the Fed
chair during the two thousand eight financial crisis The Fed
chair and the vice chair are appointed by the president
to reign over the board of governors during the president's
four year term In total there are seven members on
the board of governors all appointed by the press and
confirmed by the Senate The Fed is supposed to be
independent of current political happenings and the current presidential administration
So all board members must pass muster through two out
of three U S Government branches All right well the
board of governors including the Fed chairman are the seven
head honchos of the Fed But the board of governors
aren't the only ones in club fed All right well
we also have 12 Federal Reserve banks that span the
country Each Federal Reserve Bank is responsible for a region
of the US So the Federal Reserve banks are kind
of like the nervous system of the federal Fed branching
out to reach all areas of the U S They're
located in major cities in the regions that they serve
in each of the Reserve Bank's do their own day
to day thing But they're supervised by the Board of
Governors while the Board of Governors is supervising 12 Fed
Reserve banks that 12 Fed Reserve banks or supervising other
banks called member banks which include all national banks So
you know most banks we'll reserve banks lend money to
banks to accept deposits keeping liquidity minimum standards and then
these banks enforce compliance of laws designed to protect consumers
like things like the fair credit lending laws and all
that kind of stuff We'll reserve banks are weird since
they're kind of private and kind of public What economists
call Quays I governmental They're supposed to function publicly supervising
the commercial banks in their area and everything but they're
largely managed and funded privately Commercial banks in each region
hold stock in their regions Federal Reserve Bank which means
the reserve banks are essentially owned by commercial banks It's
the same idea that shareholders have those who own shares
of stock in a company owned that company well except
that reserve banks are supposed to be keeping a regulatory
eye on these banks that are funding them So the
reserve banks are funded by the banks that they're policing
Yeah maybe conflict of interest there Why Well because they're
not supported by tax dollars They're supported by the interest
they collect from commercial banks Well remember when the Fed
was made it was designed to be separate from the
current politics and from the rest of governments The idea
is that no matter which way the political wind is
blowing the Fed can remain strong and independent you know
the Beyonce away A lack of funding from the public
sector means that well they had to get it from
the private sector Reserve banks aren't like normal banks Each
Reserve Bank has its own nine member board of directors
Three of the directors were chosen by the Board of
Governors Up on High and the other six Reserve Bank
directors are elected by the member banks in their region
Yet reserve banks are funded by their member banks that
they regulate And member banks also elect 2/3 of reserve
bank directors which means member banks have a big hand
in well basically saying who regulates them And if that's
not complicated enough yeah we're gonna keep going There's one
more piece to the Fed puzzle We've got the board
of governors the Reserve banks and finally the funk also
known as the Federal Open Market Committee Will the funk
or FOMC is what makes changes happened The policymaking branch
of the Fed now the FOMC isn't exactly its own
branch It's made up of people from the board of
governors and the president of the Reserve Bank's Well the
chair of the board of governors is usually the chair
of the bomb But don't worry there is some democracy
to it The epilepsy also includes all the board of
governors as voting members plus the president of the Federal
Reserve Bank of New York Right that one special It's
the on ly reserve bank prez who always gets a
vote There are four other voting spots in the FOMC
that the remaining 11 Reserve Bank president's fill by battling
it out Thunderdome style Yeah okay while the other four
voting spots are filled by the remaining 11 Reserve Bank
president's taking turns serving for one year at a time
While seven Reserve Bank presidents don't get to vote at
any given time they still take part in the FOMC
meetings taking all things monetary policy into account when interest
rates go up or down It's because the FOMC is
doing their monetary policy jamboree Okay well the board of
governors the reserve banks and how they all come together
in the Federal Open Market Committee make up the Fed
The Fed does not mean the federal government and is
actually designed to be separate from the federal government Even
some politicians have made that mistake before Nathan Oh it
wasn't pretty While the Fed functions is a commercial bank
hall monitor and piggy bank for the U S Treasury
the main thing the Fed is known for in the
public eye is changing of interest rate The general idea
of interest rate tinkering is that the process ripples outward
affecting the entire economy of the U S and the
world When the Fed charges higher interest rates to member
banks well member banks in turn charge higher mortgages car
loans credit card rates to consumers When things are more
expensive consumer spending generally slows when the Fed makes it
cheaper from member banks to borrow well Interest rates are
low then and that usually increases consumer spending Through this
ripple effect of interest rate Pickering's and controlling the money
supply the Fed aims to keep prices stable and unemployment
low You know the stuff of monetary policy well Besides
conducting monetary policy the Fed is also supposed to keep
financial system stable to police commercial banks and to protect
consumers from predatory banking practices or anything It's just not
fair While it's supposed to work that way it doesn't
always since member banks fund and elect the same Reserve
Bank reps who were supposed to be policing them While
they're about to be you know conflicts of interest There
are some rules in place to prevent this but they
aren't always followed For instance in two thousand eight chairman
of New York's Reserve Bank the one special Reserve bank
that always gets to vote in the bomb was also
on the Goldman Sachs board of directors and they invested
had a whole bunch of stock in Goldman Sachs And
that guy wasn't alone Have also been Reserve Bank board
of directors who've been affiliated with Citigroup JPMorgan Chase and
other financials institutions while serving affiliation with commercial banks while
also working for Reserve Bank is the kind of conflict
of interest that could potentially interfere with the Fed's role
as an enforcer of financial regulations You know the feds
consumer protecting hall monitor duties and all But like the
federal government the Fed isn't perfect but it's always God
and it's carried us pretty far thus far The US
dollar remains the most powerful currency in the world thanks
to economic growth and currency stabilization and the fact that
it's been six days a week doing powerlifting at the
gym
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