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 Federal Open Market...15 Views
finance a la shmoop what is the Federal Open Market Committee... FOMC! come say it
with me FOMC yeah that's the noise of meatball makes when it hits the floor it [Meatball lands on the floor]
also happens to be the acronym for the Federal Open Market Committee and part
of its purpose in life is to manage financial outcomes through monetary
policy all right well the Federal Reserve pulls three levers of monetary [3 Levers appear]
policy discount rates open market operations and bank reserve requirements
those are the big three the big three monetary policies used to try and [Monetary policies appear]
control the economy well the font is responsible for the open market
operations part of that equation it tries to fight the twin evils of [Person pulls open market lever]
unemployment and inflation and among other things if unemployment is high
well in general the FOMC will seek to increase the supply of money by holding
back on sales of government paper like t-bills bonds notes and all that good
stuff leaving more cash sloshing around in the [Dollar bills appear]
marketplace and hopefully encouraging the cost of renting money or interest
rates to decline like encouraging people to borrow because rates are cheap well
when people can borrow more cheaply yes they're incentivized to spend more at [Person picks up stack of cash]
the mall on earrings and rings for other places well it works in the opposite
direction as well with the FOMC fearing inflation while they'll issue
lots of government paper sucking out the excess cash that was previously in the [Money supply meter declines]
marketplace and likely causing interest rates to rise right so cash will be less
available and people want more to rent their precious dollars as interest got
it okay well the key issue remains that the FOMC is making money more expensive
when it does that when an issues paper sucking cash out of the system it's hard
concept for most people including me to understand here
well the FOMC called eight secret very dan Brown like meetings a year to look [Months of year appear on calendar]
through reams of data and decide what policy should be note that they're
applying monetary policy here to do their bidding not fiscal policy the gist
is that the committee is the one sitting atop monetary policy in the US and it's
the committee who makes the decisions on the big three dials they can turn one [Committee standing by 3 dials]
two and three they can sift through data on the economy jobs inflation bang
fear surveys etc and then make decisions about what to do or you know what not to
do I remember that Soup Nazi from Seinfeld no bonds for you [Nazi holding a bond]
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