All about Tapering, Taper tantrum, Quantitative easing

 

Index
1. Tapering
2. Taper tantrum
3. Quantitative easing

 

 

Tapering

 

 

Taper means 'to taper in width', and it refers to a process in which athletes who require endurance, such as marathons and swimmers, gradually reduce their training amount before an important event. It became a famous saying in May 2013 when Ben Bernanke, chairman of the U.S. Federal Reserve(Fed), mentioned it.

 

U.S. Federal Reserve(Fed)/ Source : 신화연합뉴스

 

Tapering refers to the gradual reduction of the scale of quantitative easing by the Federal Reserve. Tapering is a policy in which the central bank gradually reduces market liquidity by gradually reducing the size of bond purchases as part of its exit strategy. As used by Chairman Bernanke, tapering is interpreted as a method of reducing the size of asset purchases in the context of quantitative easing policy, unlike 'tightening', which means an increase in interest rates with the same austerity.

 

If the tapering is implemented in earnest, investors will sell their assets in anticipation of an interest rate hike, and it is analyzed that there is a possibility of a foreign exchange crisis in some countries due to the flow of dollar funds from emerging countries. For this reason, the market is very keenly watching when the Fed will implement tapering, and the stock market is engulfed in fear even just talking about tapering.

 

In December 2013, the Federal Open Market Committee (FOMC) announced that, beginning in January 2014, purchases of Treasury and Mortgage Bonds (MBS) would be reduced from $85 billion per month to $75 billion per month, with further reductions depending on future economic conditions. In other words, we started the tapering of quantitative easing, which was carried out during the global financial crisis of 2007-2008.

 

After that, the market plummeted and was engulfed in an instant. This paroxysmal response to taper is called a taper tantrum.

 

Meanwhile, on December 15, 2021 (KOREA time), the Federal Open Market Committee (FOMC) decided to freeze the key interest rate at 0-0.25% and double the tapering rate at the regular meeting of the Federal Open Market Committee (FOMC). The amount of asset purchases, which was $120 billion per month until October 2020, will be reduced by $15 billion per month from November 2021, and then reduced by $30 billion from January 2022. Accordingly, the end of the tapering will be moved from June 2022 to March 2022. Meanwhile, the Fed has predicted that it will raise interest rates three more times in 2022. In 2023, the base rate will be raised three more times, and by 2024, the base rate is expected to reach 2% per annum.

 

 

 

 

Taper tantrum

 

 

Originally, taper tantrum is a medical term to describe the psychological anxiety experienced by athletes before a big game. In global financial markets, it refers to the occurrence of a shock in which the value of currencies and stock prices of emerging countries decline together.

 

The shock experienced by the financial market when the US quantitative easing policy turns into austerity. It refers to the shock that occurs when the capital flowing into emerging countries exits when quantitative easing is tapered in developed countries at the time when the financial crisis subsides.

 

In 2013, as capital returned to the United States following the reduction of quantitative easing by the US Federal Reserve (Fed), emerging markets experienced a decline in stock markets and a sharp rise in the exchange rate, causing chaos in the financial market. Since the global financial crisis triggered in the United States in 2008, emerging countries have experienced “taper tentrum” three times (first in 2013, second in 2015, and third in 2018). In 1994, then-Fed Chairman Alan Greenspan unexpectedly raised interest rates, causing the Mexican financial crisis. And in 1937, right after the Great Depression, the Dow fell 49.1% as Chairman Mariner Eckles raised its reserve requirement to recover the dollar released as a way to combat the Great Depression. Also in 2013, a triple weakness occurred in emerging market currencies, bonds and stocks, as Chairman Ben Bernanke hinted at a possible tapering.

 

 

 

 

Quantitative easing

It is a policy in which the central bank purchases various assets to increase the money supply in the market when the interest rate cut cannot be expected because the base rate is already too low. The central bank is trying to stimulate the economy by mobilizing issuance power and increasing debt.Quantitative regulation (or quantitative control) and qualitative regulation (or qualitative control) are the means by which the central bank regulates the money supply in order to tighten or ease finance, and quantitative easing belongs to quantitative regulation.

 

The assets that the central bank buys are diverse, such as government and public bonds, mortgage-backed securities (MBS), and corporate bonds.

 

Major advanced countries such as the US, UK, Europe, and Japan have been implementing quantitative easing policies all at once after the financial crisis. As the money supply increases, the value of the currency decreases, so while quantitative easing has the effect of increasing exports, it can also lead to inflation. On the other hand, excess liquidity flows into emerging markets, raising the currency values ​​of emerging countries.

 

As the economy slumped due to the COVID-19 outbreak, countries around the world, including the United States, the European Union, and the Bank of Korea, implemented quantitative easing policies.