Economic tapering is one of the tools in the hands of the Central Bank institution of a country or a region like the Federal Reserve (FED) of the US or European Central Bank, Bank of England, Japan Central Bank, and others to control monetary decisions in a country or a given region.
Traditionally, the Central Bank formulates monetary policies, sets interest rates, monitors commercial banks, and generally ensures that there are economic activities and adequate money supply within a country. The central bank has to ensure production and circulation of money to deficient sectors of the economy thereby stimulating economic activities in target or new developmental sectors.
Central Banks during Covid 19
In recent times, the Covid-19 pandemic has compelled Central Banks to intervene and ensure that economic activities are sustained in difficult times. In the US, the FED in conjunction with government policymakers deployed stimulus packages for citizens and businesses to weather the storm of low-economic activities, shut-downs, and lock-downs that came with the Covid pandemic.
In effect, more money was produced, distributed, and circulated to individuals, businesses, and for strategic purposes. These monetary activities are more or less referred to as quantitative easing of the economy, that is, making the barriers to economic activities easy for the troubled economic environment. A lot of funds were pumped into the economy gradually stoking the fever of inflation. This is similar to what most economies are experiencing today.
When too much money is in circulation and inflation rises in an economy, the banking Czar is expected to begin a process of reducing the money in circulation by tightening the economy. This is the summary of the economic tapering programme.
FED Tapering
Tapering is the opposite of quantitative easing,( that is, the release of stimulus and central bank assets into the economy), it triggers a period when the central bank announces its plans to slow asset purchases and either sell off or allow assets to mature. This is intended to reduce the amount of total central bank assets and, in turn, the money supply.
The US FED is expected to announce the trimming of its $120 billion in monthly asset purchases before the end of the year, starting from the 4th quarter as the U.S. economy recovers strongly from Covid-19, contrary to the earlier plans of 2nd quarter of 2022.
The US Federal Reserve meeting earlier this month stated that the FED officials feel “the Fed has come close to reaching its economic goals and soon could begin normalizing policy by reducing the pace of its monthly asset purchases.”
The Fed would reduce the $120 billion a month in bond buys slowly. The minutes indicated the central bank probably would start by cutting $10 billion a month in Treasurys and $5 billion a month in mortgage-backed securities. The Fed is currently buying at least $80 billion in Treasurys and $40 billion in MBS. The target date to end the purchases should there be no disruptions would be mid-2022.
How successful can the Tapering Be?
Historically most tapering programs did not fully accomplish their purpose because of multifarious economic factors. The tapering being planned by the FED is expected to raise interest rates marginally and should be beneficial to prices at the stock and fixed income markets provided other factors fall in line particularly the economy continues to accelerate.
However, the vaccination controversy is affecting workers available to work, a large population of potential workers are sick, there is also an energy and logistic crisis rocking the US and European economy, these can undercut the immediate impact of the tapering programme.
The best approach for the Fed and other regional Central Banks is to gradually implement the tapering programme while closely watching the economic indicators and other chain effects on dependent economies.
