Definition
“Taper Tantrum” is a term coined to describe the 2013 surge in U.S. Treasury yields, resulting from the Federal Reserve’s announcement of future tapering of its policy of quantitative easing. The tapering signaled a reduction in money-supply expansion and consequently triggered a violent reaction in the bond market. The term is now used to refer to any market reaction to changes or expected changes in a central bank’s monetary policy.
Key Takeaways
- Taper Tantrum refers to the reaction from investors when the U.S. Federal Reserve announced in 2013 that it would start tapering its quantitative easing program, hinting towards a reduction in money supplied into the financial system.
- The term symbolizes the noticeable spike in U.S. Treasury yields, which resulted from investors selling off their Treasury holdings out of fear that the Fed’s tapering would lead to increased interest rates.
- Even though it originated in the U.S., the Taper Tantrum had a global impact, particularly on emerging markets. The sudden pull-back of foreign capital led to economic and financial instability in these regions.
Importance
“Taper Tantrum” is an important finance term as it refers to the market volatility in response to the Federal Reserve’s announcement or anticipations of decreasing, or “tapering”, its quantitative easing policies, specifically buying bonds to stimulate economic growth.
This phenomenon was first observed in 2013 when the Federal Reserve suggested a slowdown in its bond-buying program.
This triggered a panic response in the markets, causing bond yields to skyrocket, stock prices to plummet, and currencies in emerging markets to weaken sharply.
The term is significant as it symbolizes the sensitivity of financial markets to changes in monetary policy and serves as a cautionary reference for central banks in communicating and executing policy changes.
Explanation
The term “Taper Tantrum” references an economic event that occurred in 2013 following a statement by then-Federal Reserve Chair Ben Bernanke. He stated that the Fed was considering tapering, or lessening, its aggressive monetary stimulus, essentially signifying a potential end to the economic measures introduced to tackle the 2008 financial downturn.
The prospect of the Fed slowing its purchases of bonds provoked a reactionary response in the financial markets worldwide, with traders hurriedly selling off bonds, equities, and other assets perceived as risky to avoid being caught in the potential downturn. The severe market reactions caused interest rates to leap and stock markets to plummet, hence the term “Tantrum.”The purpose behind the Taper Tantrum lies in its aftermath.
It served as a lesson about the interconnectedness of global financial markets and the possible effects of major economic policy shifts – especially those from significant entities like the US Federal Reserve. The episode demonstrated that mere indication of a future change in a central bank’s monetary policy could provoke intense volatility in global markets.
Therefore, it is a crucial reference point for investors, economists, and policymakers when considering the potential market impacts of shifting monetary policy.
Examples of Taper Tantrum
U.S. Bond Market (2013): The original “Taper Tantrum” occurred back in May 2013 in the United States when former Federal Reserve Chairman Ben Bernanke suggested the Fed might start reducing its economic stimulus policies. The comments startled investors, leading to a sharp increase in Treasury yields as they sold off bonds, anticipating the Fed would slow, or “taper,” its purchases. This became the textbook example of a Taper Tantrum.
India’s Rupee Depreciation (2013): In August 2013, the Indian market also witnessed its version of the “Taper Tantrum.” After the US Federal Reserve announced tapering of its bond-buying program, foreign institutional investors pulled out billions of dollars from the Indian market. This led to a sharp depreciation in the value of the Rupee against the US Dollar and a extreme volatility in the stock market.
Emerging Markets (2018): There was a similar situation that occurred in 2018 when the Fed was again considering raising interest rates and unwinding its balance sheet after the period of quantitative easing post the 2008 financial crisis. The prospect of tightening global financial conditions led to sell-offs in many emerging markets, diminishing their currencies’ values and causing a spike in inflation. Countries with high external debt such as Turkey and Argentina were hit particularly hard, demonstrating a sort of global “Taper Tantrum” effect.
FAQs about Taper Tantrum
1. What is a Taper Tantrum?
Taper Tantrum pertains to the reaction of investors when the Federal Reserve signals it might lessen or “taper” its bond purchases.
2. When did the term Taper Tantrum first appear?
The term Taper Tantrum first appeared in 2013, when Ben Bernanke, the chair of the Federal Reserve suggested that the Fed might begin to decrease its bond purchases.
3. Why are investors concerned with Taper Tantrum?
Investors are concerned with Taper Tantrum because it can lead to an increased bond yield, resulting in an increased borrowing cost. This can consequentially decrease the demand for riskier assets.
4. How can one protect their portfolio from a Taper Tantrum?
Investors can protect their portfolios from a Taper Tantrum by diversifying their assets, maintaining a long-term perspective, and staying flexible with their strategies.
5. How does a Taper Tantrum affect the economy?
A Taper Tantrum can affect the economy by triggering financial market volatility, affecting asset prices, and causing interest rates to rise abruptly.
Related Entrepreneurship Terms
- Quantitative Easing
- Monetary Policy
- Federal Reserve
- Interest Rates
- Bond Yields
Sources for More Information
- Federal Reserve: The official website of the U.S Federal Reserve provides in-depth data, research and analysis on various financial topics including Taper Tantrum.
- Bloomberg: Known for its financial news coverage, Bloomberg offers detailed articles explaining the Taper Tantrum.
- Investopedia: An online resource offering an expansive financial dictionary, including easy-to-understand definitions of financial terms like Taper Tantrum.
- Financial Times: The Financial Times is a leading global business publication that provides high-quality news and analysis on the Taper Tantrum.
