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Tapering

CA Suryakant Dubey (CA ) (931 Points)

31 October 2013

What isTapering in reference with Stock MArket..?

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Sathish M (Management Accountant) (40581 Points)
Replied 03 November 2013

What is Fed Tapering?

“Tapering” is a term that exploded into the financial lexicon on May 22, when U.S. Federal Reserve Chairman Ben Bernanke stated in testimony before Congress that that Fed may taper - or reduce - the size of the bond-buying program known as quantitative easing (QE). The program, which is designed to stimulate the economy, has served the secondary purpose of supporting financial market performance in recent years.

While Bernanke's surprising pronouncement led to substantial turmoil in the financial markets during the second quarter, the Fed has not yet begun to taper QE. The decision to adjust the program is based on incoming economic data, and the economy has not yet become strong enough for the Fed to feel confident in reducing the level of stimulus. As a result, the Fed's bond-buying program remains fully intact at a pace of $85 billion per month.

Currently, the consensus estimate is that the Fed will begin to reduce the size of its QE program at some point in 2014, most likely near the end of the first quarter. However, the range of potential outcomes is wide given that 1) the program is data-dependant and 2) both the Fed chairmanship the several board positions will change early next year. As a result, both the timing and extent of any tapering remains very much up in the air.

("Data dependant" means that weak growth would lead to a continuation of QE, improved growth and/or rising inflation would prompt the Fed to pull back).

How Will a Tapering Look?

Tapering isn’t an immediate, dramatic event. Instead, it is likely to take place over an extended period of time so as to create minimal market disruption. Also, as Bernanke says, it is going to be dependent on economic conditions. The Fed may pull back slightly if the economy continues to strengthen, but it could also increase the program again if the economy slowed or the financial markets were shocked by an unforeseen crisis.

The takeaway is that tapering doesn’t represent a sudden end to QE, nor is it likely to be a steady, predictable decline. Instead, it will be a longer process that takes place over a period of a year or more once it finally begins.

Source: Net