The Tapering it is the gradual reduction of the extraordinary measures of the expansive monetary policies that the central banks carry out of their activities, with the intention of stimulating the economy. It is a measure that is directed first of all to interest rates and to the work of the various expectations that investors have about them.
You have the ability to understand some common policy adjustments like reserve requirements and discount rate or even more drastic ones in the case of quantitative easing.
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In this article you will find:
How is Tapering defined?
To define this measure, it is necessary to understand well what is the context of the quantitative easing program of what is known as the Federal Reserve. This program dealt with the purchase of high-numbered bonds with the intention of improving economic conditions.
Central Banks may adopt a variant of policies that stimulate the growth incentive. Despite this, you should try to maintain short-term improvements in order to meet long-term market expectations.
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In the event that the Central Bank reduces its activities quickly, it would result in the economy enters into recession and if it does not reduce its activities, it could generate a large increase in the inflation.
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How is Tapering done?
This measure has to be a gradual process, because if done suddenly, it could cause many negative effects such as those mentioned below:
- Changes in the interest rate.
- Strong tensions in the debt markets in which it operates.
- Lack of control in the currency markets and stock exchanges, among others.
- Decrease in consumption and investment, resulting in an economic shock.
- All this sums up that, when carrying out this measure, central banks must be careful to reduce gradually the amounts they invest in the markets while increasing the interest progressively.
Tapering Philosophy of Meaning
Being open to investors who relate to the Bank's activities of tomorrow can help set high expectations within the market. Due to this reason, the Central Banks carry out a Gradual tapering instead of abruptly stalling their monetary policies.
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The Central Banks explain how they will carry out this measure and the conditions they will require to be able to follow or stop it in order to lower market expectations. In this sense, it is possible to know in advance what are the reductions that will be made in the future and thus the market can adjust ahead of time.
When did this term begin to be used?
Its origin comes from the reduction of the extraordinary measures that the United States carried out against the problem of the crisis in 2008. However, this word began to be used more in 2013 when the President of the FED, stated before the Congress that the agency could begin to reduce through the bond purchase program during the next months.
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This measure will not consist of draining any part of its built-in liquidity, rather it will gradually introduce less. Which means that the FED will not sell the bonds purchased, but will continue to buy, although in lesser quantity. This will determine that the process can be modulated depending on the results obtained and thus increase success.
What is the current situation of Tapering?
The United States of North America was activated with its stimulus measures much longer than Europe, for many years now. growing with a broad consistency and began its Tapering since 2013 when the eurozone had not even started stimuli monetary.
In 2014 it was when he finally managed to close with the program and then after about six years was when they increased money in the economy.
The Federal Reserve also began to direct the normalization of interest rates, in this way it is expected that this same year, 1.50% can be reached and thus the return of an economy can be completed without the need for aid superficial. While this is happening, in Europe, the program began in March 2015, with the aim of culminating in 2017.
The ECB announced in 2016 that an extension would be made that will last until 2017, even until 2018 if necessary. Since the month of April, it was possible to reduce the amount that was at 80,000 million, reaching 60,000 million euros.
Upon learning of the existence of this extension as well as the duration of the stimuli that were carried out in the United States and the recovery of the economy that is intended in Europe, it can be foreseen that the QE may last longer and the European Tapering it can be progressively reduced in terms of stimuli until it is able to confirm that its economic recovery is already a total reality.
