The financial world has a habit of coining new definitions for old words, and then constantly referring to these new usages as if everyone should know what they mean.
One relatively recent such coinage is “tapering”.
“Tapering” relates to central bank policies.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Since 2009 and the great financial crisis, central banks have been printing money to buy assets such as government bonds.
This is known as “quantitative easing”, or QE. The aim – or at least, one of the aims – of QE is to reduce the cost of borrowing across the entire economy. This makes it cheaper for those with debts to pay their interest bills.
It should – in theory at least – also make it more appealing for companies to borrow money to invest in expanding their businesses. This in turn should help to boost economic growth.
However, another side-effect of QE has been to drive up asset prices across the board, from bonds to shares to property prices.
As a result, investors tend to like it when central banks add more QE, but aren’t so happy when they reduce it.
It’s not entirely clear who actually coined the term “tapering”, but it sprang into widespread use after May 2013.
That month, Ben Bernanke, who was then the head of the US central bank – the Federal Reserve – indicated in a speech that the central bank was starting to consider reducing the volume of assets that it was buying via QE.
So “tapering” simply describes a reduction in the amount of QE a central bank is doing.
Markets didn’t like this idea, fearing that less QE would spell lower asset prices. The ensuing period of turbulence became known as the “taper tantrum”. This resulted in the Federal Reserve taking several months longer than expected to slow down the pace of QE.
The term “taper” is becoming relevant again today because central banks are now looking at stepping back from the emergency monetary policy they launched during the coronavirus pandemic.
Whether we will see a repeat of the 2013 “taper tantrum” or not, remains to be seen.
To learn more about monetary policy and markets, subscribe to MoneyWeek magazine.
-
Private school fees soar and VAT threat looms – what does it mean for you?Rising private school fees could see more than one in five parents pull their children out of their current school. Before you remortgage, move house or look to grandparents for help, here’s what you need to know.
-
Best and worst UK banks for online banking revealedWhen it comes to keeping your money safe, not all banks are equal. We reveal the best and worst banks for online banking when it comes to protecting your money from scams
-
What is an investment trust?Videos “Active” investment funds come in two main varieties, one of which is investment trusts. But what exactly is an investment trust?
-
What is a dividend yield?Videos Learn what a dividend yield is and what it can tell investors about a company's plans to return profits to its investors.
-
High earners to pay nearly £2000 more in tax due to fiscal dragVideos The government froze tax thresholds, which will drag employees into higher tax bands as wages rise with inflation. We explain what fiscal drag is, and how to avoid it.
-
What is a deficit?Videos When we talk about government spending and the public finances, we often hear the word ‘deficit’ being used. But what is a deficit, and why does it matter?
-
Too embarrassed to ask: what is moral hazard?Videos The term “moral hazard” comes from the insurance industry in the 18th century. But what does it mean today?
-
Too embarrassed to ask: what is contagion?Videos Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
-
Too embarrassed to ask: what is a marginal tax rate?Videos Your marginal tax rate is simply the tax rate you pay on each extra pound of income you earn. Here's how that works.
-
Too embarrassed to ask: what is stagflation?Videos Traditionally, economists and central bankers worry about inflation or recession. But there is one thing worse than both: stagflation. Here's what it is
