It is an occasionally used monetary policy, which is adopted by the government to increase money supply in the economy in order to further increase lending by commercial banks and spending by consumers.
The central bank infuses a pre-determined quantity of money into the economy by buying financial assets from commercial banks and private entities. This leads to an increase in banks’ reserves.
The most successful QE effort was undertaken by the U.S. Central Bank of U.S. Reserve added almost $2 trillion to the money supply after most of the western countries caught in the web of 2008 sub-prime crisis. That’s the largest expansion from any economic stimulus program in history.
As a result, the debt on the Fed’s balance sheet doubled from $2.106 trillion in November 2008 to $4.486 trillion in October 2014. On December 18, 2013, the Fed began to taper its bond purchases by $10 billion per month, to $75 billion. After a series of reductions throughout 2014, the program concluded following the Fed’s October 29-30 meeting.
What is Fed Tapering
“Tapering” is a term that exploded into the financial lexicon on May 22, when U.S. Federal Reserve Chairman Ben Bernanke stated in testimony before Congress that that Fed may taper – or reduce – the size of the bond-buying program known as quantitative easing (QE).
The program, which is designed to stimulate the economy, has served the secondary purpose of supporting financial market performance in recent years. This tapering is called as “Fed Tapering” as is being implanted by Federal Reserve.
Taper Tantrum
A taper tantrum is a knee-jerk reaction by investors after the Federal Reserve announces scaling back its asset purchases.
A taper tantrum refers to the movement in bond yields caused by investor reactions to a central bank announcing future tapering of bond-buying programs. Even if the central bank does not stop purchasing bonds immediately, investors may sell off their bonds, which forces yields to rise. These sales are said to be a “tantrum” in reaction to the news of a tapering.
Quantitative Easing in Europe
The asset purchase program, a monetary experiment known as quantitative easing (QE), was launched in March 2015 to prevent sub-zero inflation from further hitting an economy still reeling from the euro zone debt crisis. The ECB has spent 2.6 trillion euros ($3 trillion) over almost four years, buying up mostly government but also corporate debt, asset-backed securities and covered bonds— at a pace of 1.3 million euros a minute.
That equates to roughly 7,600 euros for every person in the currency bloc. As intended, QE has lifted economic growth while wages and lending have risen but inflation remains subdued, complicating the QE exit and ensuring interest rates will stay at record lows for some time.
The ECB has also been criticized because the bond buying has depressed interest rates and hurt European banks’ profitability. The ECB will also plow money from maturing bonds it holds back into the market for years to anchor borrowing costs.