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What Does “Taper” Mean

We all hear the term, “taper” from a Federal Reserve perspective. But what does this term actually refer to? Let’s take a look.

First let’s highlight the Federal Reserve’s bond purchasing program known as quantitative easing or QE. This is a monetary policy utilized to lower interest rates and increase money supply. The FED purchases securities in the marketplace, which in turn increases the money supply and lowers interest rates. The most recent cycle, otherwise known as QE3, started on the 13th September 2012. The current cycle incorporates $85 billion per month of US Treasury and mortgage backed securities.

The term “taper” was first introduced back in May 2013 by Federal Reserve Chairman, Ben Bernanke. This term referred to the slowing and or reduction of QE purchasing. When first announced, the markets experienced a great deal of volatility, pushing interest rates up significantly.

Most recently, The Fed announced plans to cut its monthly purchases of US Treasuries and mortgage backed securities from $85 billion in December to nothing by the end of next year, in a series of small steps, starting with a reduction to $75 billion in January 2014.

To recap, the word taper is not a fiscal policy. The term refers to the slowing of quantitative easing, a Federal Reserve liquidity policy.