Tapering
Tapering is QE in reverse. (Not EQ; that's the thing you do with your car stereo to make the bass really annoy people at stoplights.)
Back up. What’s QE? QE = Quantitative easing, which is when a central bank buys government securities back from the market and banks to increase the money supply, encouraging lending and investing to stimulate the economy. Got it? Got it.
Tapering, like QE, is a slow process, like drip coffee. Drip. Drip. Drip.
The central bank (the Fed in the U.S.) buys government securities from the market at a slower rate, decreasing its bond-buying QE program and slowly winding down the money supply. If done too fast or at the wrong time, tapering could lead to a whoopsies recession. If done too late, it’ll just lead to inflation.
With the risks of messing up tapering, why bother? Well, quantitative easing is a tool for when the economy is down. In order to have QE available to use as a tool when it’s needed, a central bank needs to have government securities to buy back...and if it already bought them all from the last QE, the tool is unavailable.
Think about it like a lifeguard with a buoy: the lifeguard throws it out to help. If he wants to throw it out again next time, he needs to reel the buoy back first.
When the 2007-2008 financial crisis shocked the U.S. (and, um, the world), the Fed bought government securities back, increasing the money supply, as part of the government’s economic stimulus package. In order to use QE again in the future as an economic buoy, the Fed needed to reel that buoy back in via tapering.
They did in 2013, lowering the amount of securities purchased each month...as long as inflation and unemployment rates didn’t seem to notice too much. The Fed doesn’t want to cause another financial panic, so proceeding in a slow and steady manner, watching inflation and unemployment, is key to tapering like a pro.
Related or Semi-related Video
Finance: What is a quant fund?0 Views
Finance a la shmoop. What is a quant fund?
Oooo, algorithms.... Say it with me people algorithm, math, black boxes, spooky [Equations flying around]
numbers a quant fund is an investment fund
well usually hedged or with elements of hedging that relies solely on the math [Definition of a quant fund]
of everything. They don't care much that toothpaste is now being used for crow's [Man putting toothpaste of his face]
feet abatement and that there's a five-year bullish trend for Colgate they
don't care that Tesla is dominating the world with electric cars and that [Tesla logos popping up all over the world]
gasoline will likely be obsolete in a few decades and they don't care that
people are living longer so life insurance companies have a tailwind [Life insurance sail boat going fast]
behind them too because insurees will be paying those premiums 17 more months
on average in the future before they croak. Well all quant funds care about is [People handing over money before they disappear]
the math of the math, typically a quant fund builds its own proprietary complex
math laden models which automatically trigger a series of trades at any given [Equations flying around]
moment in the trading day hoping to benefit even in tiny ways from what are
essentially arbitrage opportunities or theoretically riskless trades that can [Definition of arbitrage]
be made taking advantage of mixed pricing in the market all around the
world. Quant funds as they are now classified as an alternative investment
in the same vein as hedge funds charge the same exorbitant fee structure and [High fee structure label on quant funds]
because they do such vast volumes of trading that is something like one-third [Stocks being moved around]
of all u.s. stock trades now derive from quant fund managers well they give out
massive commissions and have equally massive sway with the brokerage
community to you know say nice things about them and encourage people to talk [Newspaper article about quant funds]
about how great quant funds are yeah and you've probably seen myriad ads on TV [Woman watching TV]
for their funds you know like this one math it does a body good.. [Dwayne Johnson on the advert]
Up Next
The Federal Open Market Committee's purpose is to manage financial outcomes through monetary policy.
