What is tapering?

Key takeaways

• Tapering is the process of the Federal Reserve reducing algo easing.

• Tapering is not a tightening policy, but only a phase of the complete algo policy cycle.

• Tapering has a more significant impact on gold, ​bonds, and real estate markets.

Concept Explanation

Tapering is derived from the word taper, generally referring to the Federal Reserve's reduction of algo easing (QE) scale operation.

QE stands for Quantitative Easing, algo easing, where central banks inject liquidity into the market through purchasing bonds, ​bonds, and other banking financial assets.

Tapering is tightening monetary policy, gradually reducing asset purchase scale, gradually exiting QE, and withdrawing liquidity.

A complete quant policy cycle includes: Quantitative Easing (QE), Tapering, Quantitative Tightening (QT), therefore Tapering is not a tightening policy, but the gradual reduction of asset purchases by the Federal Reserve until no more asset purchases are added.

Impact of Tapering

Historically, Tapering has a more pronounced impact on the following three types of assets:

First, gold. Due to the exit of monetary stimulus policies and the favorable economic conditions, gold prices were adversely affected during the last Tapering discussion and implementation phase (2013 to 2014), with an overall decline of over 20%.

Second, bonds. The Fed's reduction in asset purchases directly affects the demand for US Treasuries. During the last Tapering discussion period (May 2013 to the end of 2013), US Treasury bonds were impacted by liquidity, leading to a significant price decline, temporarily causing a sharp 130 basis points rise in bond yields. However, during the Tapering implementation period (end of 2013 to October 2014), bond prices rose again, and bond yields declined once more.

Third, real estate. During the last round of quantitative easing implementation, the US real estate market saw a significant rise, with the S&P House Price Index increasing from 2.5% at the start of QE to 13.7% before Tapering. Subsequently, as Tapering began, the index growth rate quickly fell, reaching as low as 4.3%, showing a clear impact of Tapering on real estate prices.

In summary: Although Tapering is not yet a tightening measure, it represents the expectation of monetary policy normalization, especially when asset valuations are at historically high levels. Therefore, the impact of the Tapering process on asset price fluctuations cannot be ignored.