Tapering

Tapering

Context:

Fed Chair Jerome Powell’s Jackson Hole speech was a balanced outline on the economy even as it confirmed the advent of QE tapering before the end of 2021.

Concept:

Quantitative Easing:

• QE refers to an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.
• Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
• QE helps the economy by reducing the long-term interest rates, thus making business and mortgage borrowing cheaper thus giving a signal that the US Fed wants to support the economy.

Tapering:

• Tapering is the gradual slowing of the pace of the Fed’s large scale asset purchases. Once the tapering is complete then the Fed may go for reduction in the size of the balance sheet. The aim is to slowly remove the monetary stimulus.
  Impact of tapering
• Outflow of FPI can take place.