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

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.
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.
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)

What is a Taper Tantrum?

A Taper Tantrum refers to a period of extreme market volatility triggered by an announcement or expectation of reduced monetary stimulus by a central bank. The term was first used to describe the sharp increase in bond yields and significant sell-off in stocks following the U.S. Federal Reserve’s hint of tapering their quantitative easing program in 2013.

When did the term “Taper Tantrum” originate?

The term was coined in 2013 by Michael Hartnett, Chief Investment Strategist at Bank of America Merrill Lynch, following the market’s adverse reaction to the Federal Reserve’s suggestion of tapering its bond purchases.

Why are Taper Tantrums significant to financial markets?

Taper Tantrums are significant because they showcase the market’s sensitivity to changes in monetary policy. They can lead to rapid increases in interest rates, declines in stock markets, and negative effects on economic growth and financial stability.

What usually causes a Taper Tantrum?

A Taper Tantrum is typically caused by the announcement or anticipation of a reduction in monetary stimulus measures by central banks. This reduction could be in the form of scaling back bond-buying programs or raising interest rates. The anticipation of such an event can trigger investors to sell off assets, leading to market turmoil.

How can investors protect themselves from Taper Tantrums?

Investors can protect themselves by diversifying their portfolios across various asset classes, maintaining a long-term investment perspective, and staying informed about economic indicators and central bank policy. Additionally, investors can reevaluate their risk tolerance, taking into consideration the possibility of market volatility due to monetary policy changes.

Can Taper Tantrums be predicted?

While it’s difficult to predict the exact timing and magnitude of a Taper Tantrum, staying informed about central bank policies and monitoring key economic indicators can help investors anticipate potential shifts in monetary policy that could trigger a Taper Tantrum.

Have there been other instances of Taper Tantrums besides the 2013 event?

While the term Taper Tantrum specifically refers to the 2013 event caused by the U.S. Federal Reserve’s proposed tapering, there have been other instances of market volatility associated with shifts in monetary policy. For example, the European Central Bank’s quantitative easing tapering in 2018 led to some market fluctuations, although not on the same scale as the 2013 Taper Tantrum.

Related Finance Terms

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

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