What 'Tapering' Means to the Fed and How It Impacts the Economy

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Sep. 1 2021, Published 11:30 a.m. ET

When the Fed talks, the U.S. listens—even when they're telling the same old story. Recently, instead of disclosing the harsh reality of inflation yet again, Fed Chair Jerome Powell spoke about something called "tapering."

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Tapering is an economic tool that the Fed plans to use to slow the pace that it pumps money into the economy. Here's how tapering works (plus why it matters to Americans).

The Fed foreshadowed tapering in a recent talk.

During the Fed's annual symposium in Jackson Hole, Wy. on Aug. 27, Powell shared that the reserve plans to start withdrawing some of its policies that were put in place to spur economic activity during the COVID-19 pandemic.

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Currently, the Fed doesn't show any sign of increasing rates in the near future. Powell said, "We have much ground to cover to reach maximum employment." However, he mentioned that an official tapering announcement could come as soon as Sept. 21–22, when the Fed has its meeting.

What does tapering mean to the Fed?

For the Fed, tapering is the process of gradually slowing down what's called "quantitative easing" or QE.

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QE refers to a monetary policy where the Federal Reserve buys long-term securities (aka bonds) as a way to inject capital into the economy. The central bank buys these bonds from member banks, which trickles down to consumers. Since June 2020, the Fed has purchased $120 billion in bonds per month.

Initially, QE helped the Fed increase the money flow into the markets, which is a growth mechanism. Now that the U.S. is about 18 months into the COVID-19 pandemic, that growth mechanism doesn't need to be so strong, Powell suggests. Tapering would wind it down.

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Tapering isn't going to start immediately.

Powell isn't pumping the breaks on QE just yet. He foreshadowed tapering, which he says could potentially start before the end of the year. However, that's just an estimate. Investors and everyday Americans will want to keep an eye on what the Fed has to say next to determine when tapering really begins.

How tapering could impact yields

Kathy Jones, the managing director and chief fixed-income strategist for the Schwab Center for Financial Research, said that tapering too quickly could have a negative impact on bond yields for a longer period of time. Jones told reporters, "My feeling on tapering is the slower they go, the higher the yield."

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Powell, it seems, is of the same dogma. He doesn't seem to be rushing the tapering process or presuming economic health too soon.

Where do Fed rates fall into the tapering picture?

Tapering QE is a different fiscal policy than lowering interest rates. The Fed has already lowered the federal rate to near-zero, and it has yet to increase. Currently, the central bank forecasts a few interest rate hikes by 2023, which is a later date than it initially proposed.

Tapering could be a way to wean the economy off of pandemic-era stimulus in the meantime. However, Americans still await a concrete tapering plan.

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