What is tapering?

Key points

• Tapering is a process for the Federal Reserve to reduce quantitative easing.

• Tapering is not a tightening policy, but a stage of a complete quantitative policy cycle.

• Tapering has obvious influence on gold, bond and real estate market.

Understanding

Tapering is derived from the word taper, which generally refers to the Fed's operation to reduce the size of quantitative easing (QE).

QE is Quantitative Easing, quantitative easing, the central bank through the purchase of bonds, bank financial assets and other ways to inject liquidity into the market.

Tapering is to tighten monetary policy, gradually reduce the size of asset purchases, gradually withdraw from QE, and withdraw liquidity.

A complete quantitative policy cycle includes quantitative easing (QE), quantitative easing (Tapering) and quantitative tightening (QT), so Tapering is not a tightening policy, but a process in which the Fed gradually curtails its asset purchases until it no longer buys more assets.

Tapering's impact

Historically, Tapering has had a significant impact on the following three types of assets:

First, gold. Due to the withdrawal of monetary stimulus and the improvement of the economy, gold maintained a downward trend during the last round of Tapering discussion and implementation, with an overall decline of more than 20%.

Second, bonds. The Fed's cutback in asset purchases has a direct impact on demand for Treasuries. During the last round of Tapering discussions, Treasuries were affected by liquidity and prices fell significantly, causing yields to rise sharply by 130bp at one point. However, during the implementation of Tapering, the price of treasury bonds rose again, and the yield of treasury bonds fell again.

Third, real estate. During the last round of QE, the US housing market rose significantly, with the S & P house price index rising from 2.5 per cent at the start of QE to 13.7 per cent before Tapering. Then Tapering began to be implemented, and the index fell back quickly, falling as low as 4.3 per cent, and Tapering had a significant impact on the trend of real estate prices.

Conclusion: even if Tapering is not tightening, it represents expectations of a normalisation of monetary policy, especially with asset valuations at historically high quantiles. Therefore, the impact of the Tapering process on asset price fluctuations can not be ignored.