Impact of the Tapering to Stock Market.
                     IMPACT OF THE 
TAPERING TO STOCK 
MARKET
Introduction
• When an economy is stressed, that is, the government feels there is a liquidity crunch, the Central Bank 
buys up a predetermined amount of Government bonds and other assets in order to flush the economy 
with cash.
Source: groww.in
History
• Now, tapering is not necessarily a new event. However, the first time it happened in an awakened and 
digitally superior time- 2013- Taper Tantrum took the world by storm. The word ‘Tantrum’ comes in due 
to the overreaction of investors and stakeholders after the government announced tapering of the 
quantitative easing program. 
Source: groww.in
Minimal lending rates
• The minimal lending rates encouraged more people to take loans, boosted spending, and allowed 
businesses to increase investment. 
• Between 2008 and 2015, the U.S Government had pumped in nearly $4.5 trillion into its economy, a 
figure which was barely $870 billion until 2007.
Source: groww.in
Infusing capital
• It is important to note that infusing capital into the economy to absorb shocks is a short-term solution and 
can lead to hyperinflation if used for the long term. 
Source: groww.in
Muted Response of the Markets
• Part of the reason for the muted response of the markets to the tapering announcement is that the Fed 
has become increasingly transparent in recent years, signaling the markets well in advance about possible 
policy moves that will affect interest rates.
Source: www.investopedia.com
Tapering and Asset Price Bubbles
• Since the prices of financial assets—particularly debt instruments such as bonds, but also stocks—tend to 
be inversely related to interest rates, critics of QE worry that it has created asset price bubbles. 
Source: www.investopedia.com
Rising flow of funds into cryptocurrencies
• Hard assets such as real estate also may have been caught in speculative bubbles, driven by low 
borrowing rates and low returns on financial assets. Likewise, the rising flow of funds into 
cryptocurrencies may be yet another consequence of QE.
Source: www.investopedia.com
Tapering to Reduce Inflation
• Inflation has been rising, with the all items version of the Consumer Price Index For All Urban Consumers 
(CPI-U) recording a 6.2% increase during the 12 months through October 2021, up from 5.4% for the 12 
months through September 2021.
Source: www.investopedia.com
From Tapering to Balance Sheet Reduction
• QE appears to have just as much impact on the stock market as cutting the Fed funds rate used to have. In 
this vein, the next big issue for the Fed will be determining when it becomes appropriate to actually start 
reducing its balance sheet rather than adding to it at a decreasing rate, which is what the current program 
of tapering entails. That may have a significant impact on interest rates and thus also on the economy and 
the markets.
Source: www.investopedia.com
How Does Tapering Work?
• To understand how tapering works requires a deeper understanding of QE. When central banks keep 
short-term interest rates low, it encourages individual borrowers and businesses to take out loans. This 
boosts economic activity. 
Source: www.investopedia.com