Taper Tantrum

Definition

Taper Tantrum refers to the market reaction to the Federal Reserve’s announcement of a gradual reduction in its bond-buying program, known as quantitative easing. This term emerged in 2013 when the Fed signaled a potential slowdown in its asset purchases, causing volatility and a sudden rise in interest rates. Taper Tantrum highlights the sensitivity of financial markets to changes in monetary policy and their potential impact on investment returns.

Phonetic

The phonetics of the keyword “Taper Tantrum” can be represented as:/ˈteɪpər ˈtæntrəm/- Taper: /ˈteɪpər/- Tantrum: /ˈtæntrəm/

Key Takeaways

1. The Taper Tantrum refers to the 2013 financial event when the U.S. Federal Reserve signaled a reduction in its quantitative easing (bond-buying) program, leading to a sharp increase in bond yields and a significant market sell-off.
2. Investors reacted negatively to the announcement, as they feared that the reduction in bond purchases would lead to higher interest rates, which would negatively affect the value of existing bonds and other interest rate-sensitive assets.
3. The Taper Tantrum serves as a reminder of the potential repercussions of changes in monetary policy on financial markets, highlighting the importance for central banks to communicate their plans clearly and manage market expectations effectively.

Importance

The term “Taper Tantrum” is important in business and finance as it refers to a significant market event that occurred in 2013 when the U.S. Federal Reserve, led by then-chairman Ben Bernanke, announced plans to gradually reduce its bond-buying program, known as Quantitative Easing (QE). The announcement triggered a sudden and sharp increase in both US Treasury bond yields and mortgage rates, as well as turbulence in global financial markets. Investors, who had become accustomed to the steady flow of cheap money from QE, panicked and aggressively sold their positions. This term, Taper Tantrum, acts as a reminder to policymakers and markets of the potential consequences of sudden shifts in monetary policy, emphasizing the importance of clear communication and careful strategy when making decisions impacting global financial stability.

Explanation

Taper Tantrum refers to a financial market event that occurred in 2013 when the U.S. Federal Reserve announced its plan to gradually scale back its extensive quantitative easing (QE) program – an unconventional monetary policy tool used to stimulate the economy in the aftermath of the 2008 financial crisis. In essence, the Fed was purchasing large amounts of government bonds to inject money into the economy, lowering interest rates, and encouraging borrowing and investment. The term “Taper Tantrum” is derived from the financial markets’ negative reaction to this announcement, which both surprised investors and led to a surge in bond yields (rising interest rates), impacting various asset classes, including stocks and currencies, particularly in emerging markets. The purpose behind the Taper Tantrum phenomenon lies in understanding the expectations and perceptions of investors and financial markets with respect to the effects of monetary policies pursued by Central Banks during economic crises, and how it could influence the stability and functioning of the financial markets. The 2013 Taper Tantrum serves as a cautionary tale for central banks planning to wind down their QE programs or implement tighter financial policies. It also highlights the importance of effectively communicating policy changes to manage market expectations, ensuring reduced volatility and a smoother transition when unwinding economic stimulus measures. By comprehending and analyzing the Taper Tantrum, financial institutions, investors, and policymakers can better anticipate the possible implications of future monetary policy adjustments and improve their response strategies.

Examples

A “Taper Tantrum” is a term used to describe the financial markets’ reaction to the Federal Reserve potentially scaling back (“tapering”) its quantitative easing (QE) program. The phrase was first used during the 2013 Taper Tantrum, which was triggered by a mention from then-Federal Reserve Chairman Ben Bernanke that the central bank might soon reduce its bond-buying program. 1. 2013 Taper Tantrum: The original Taper Tantrum occurred in May 2013 when Ben Bernanke testified before Congress, hinting that the Federal Reserve was planning to reduce the size of its asset purchasing program. This resulted in a sharp sell-off in bond markets and a spike in Treasury yields, which in turn affected equity and emerging market assets, leading to a period of distress in global financial markets. 2. 2021 Taper Tantrum Fears in the US: Amid the economic recovery from the COVID-19 pandemic and rising inflation concerns in 2021, market participants began speculating about the possibility of a new taper tantrum. As the Federal Reserve announced a possible taper timeline later in the year, bond yields increased, causing apprehension that a sudden spike in interest rates could lead to negative consequences in the stock and real estate markets. 3. 2018 European Central Bank (ECB) Taper: In June 2018, the ECB announced its plan to reduce the size of its asset purchasing program from €30 billion per month to €15 billion per month. Although the policy change was widely expected, it still had an impact on European bond markets, with yields in countries like Germany and Italy rising as a result. However, compared to the 2013 Taper Tantrum, the reaction in European financial markets was much more restrained, with well-telegraphed communication from the ECB helping to prevent a more severe reaction. While these examples represent specific incidents related to Taper Tantrums, it’s worth noting that the term has become widely used to describe market reactions to perceived changes in central bank monetary policy. Continuing discussions around monetary tightening, interest rate hikes, or the end of quantitative easing measures can trigger other temporary market disruptions known as Taper Tantrums.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Monetary Policy
• Quantitative Easing (QE)
• Interest Rates
• Central Banks
• Financial Markets

Sources for More Information

• Investopedia
• The Balance
• International Monetary Fund
• Asian Development Bank