The phrase, taper tantrum, describes the 2013 surge in U.S. Treasury yields following the Federal Reserve’s announcement of future tapering of its policy of quantitative easing. The Fed announced it would reduce the pace of its purchases of Treasury bonds to limit the amount of money injected into the economy. The rise in bond yields in reaction to this announcement was termed a taper tantrum in financial media.
Key Takeaways
- Taper tantrum refers to the 2013 panic-induced spike in U.S. Treasury yields after investors learned that the Federal Reserve would gradually slow its quantitative easing (QE) program.
- This panic stemmed from fears that the market would collapse due to the cessation of QE.
- The panic proved to be slightly exaggerated, as the market continued to recover after the tapering program began.
Fall of 2008 to Taper Year: From Quantitative Easing to Panic
In response to the 2008 financial crisis, the Federal Reserve initiated a policy called quantitative easing (QE), which aimed to stabilize the financial sector through large-scale purchases of bonds and other securities. This increased liquidity in financial markets, stabilized them, and fostered economic growth by encouraging lending and investment.
Typically, quantitative easing is seen as a temporary fix because of potential risks like currency devaluation that could lead to hyperinflation. Economists traditionally believe in the need for the Federal Reserve to eventually wind down such measures to avoid long-term reliance by the economy—achieved through tapering.
Since 2015, the Fed has introduced various policy tools to inject money into the economy without devaluing the dollar. New mechanisms such as the repurchase agreement window opened prospects for deeper macroeconomic studies in years to come. However, any hint at tapering by the Fed could incite panic if investors feared insufficient support for the economy.
What Set Off the 2013 Taper Tantrum?
In 2013, Federal Reserve Chair Ben Bernanke announced plans to eventually reduce the Fed’s massive bond-buying program. Since 2008, the Fed had significantly increased its balance sheet, injecting trillions of dollars through bond purchases to stabilize the market. By then, investors had heavily relied on this Fed policy.
Bernanke’s hints at reducing these purchases felt like a potential shockwave, as the reduction in demand would likely decrease bond prices, increasing yields. Reacting promptly, bond investors sold off bonds, resulting in decreased bond prices and spiked yields.
Importantly, detailed actual measures weren’t put into play when Bernanke made his comments. The bond market’s extreme reaction underscored the dependence on Fed stimulus.
Pundits believed stock markets could mirror this response, threatening economic stability. Nonetheless, the Dow Jones Industrial Average (DJIA) showed resilience, only experiencing temporary dips.
The Resilient Stock Market: The Real Story
Several factors contributed to the stock market’s endurance. Despite Bernanke’s comments, the Fed continued its bond purchases, initiating an additional $1.5 trillion QE round by 2015. Furthermore, the Fed consistently expressed confidence in economic recovery, reinforcing positive investor sentiment and managing expectations through regular updates.
Ultimately, once initial panic subsided, the market stabilized. Fears proved exaggerated as financial structures adapted to the gradual withdrawal of extraordinary measures.
Related Terms: Quantitative Easing, Federal Reserve, Bond Market, Treasury Yields.
