You might want to get familiar with this term because you will be hearing it a lot: the bond taper, or more widely known as just the taper.
When markets were in free-fall as the pandemic started to spread last year, the Federal Reserve knew it had to act quick – and big – to avoid a repeat of the 2008 Global Financial Crisis.
Among a slew of measures taken by the Fed, one stood out: The central bank committed to buying a massive amount of bonds and mortgage-backed securities each month.
It was intended to stabilize markets and flood the economy with cheap credit. After all, bonds help determine all kinds of rates that are critical to Main Street, from what we pay on car loans to mortgages.
Today, the economy is improving and the jobs picture is getting better, yet the central bank currently continues to buy $120 billion worth of bonds and mortgage-backed securities every month.
But there can be big consequences to cheap credit, in surging housing prices, for example. Meanwhile, pent-up demand after the rollout of vaccines, along with supply chain shortages, has led to surging inflation.
The Fed has already indicated it will need to start reducing some of its asset purchases gradually, hence the taper.
But doing that is not so straightforward, and it carries big risks for markets, which fell last week on taper uncertainties.
Fed Chair Jerome Powell is due to give a virtual speech on Friday at an online conference that usually takes place in Jackson Hole, Wyoming.
Powell could use the speech to relay some of the Fed's thinking. Or he could opt to wait a few more weeks, until the Fed gathers for its policy meeting next month.
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