Home Markets Explainer: Federal Reserve’s taper: How does it work?

Explainer: Federal Reserve’s taper: How does it work?

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Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

Nov 3 (Reuters) – The U.S. Federal Reserve announced on Wednesday it will begin to reduce its asset purchase program this month, removing a first pillar of emergency monetary policy accommodation introduced in March 2020 to shield the economy from the COVID-19 pandemic.

Here’s a guide to why and how the Fed is cutting back on this key component of its crisis-era support and what that means for the size of its future balance sheet.

WHAT IS THE FED’S ASSET PURCHASE PROGRAM?

The Fed has gobbled up trillions in Treasuries and mortgage-backed securities (MBS) since the onset of the pandemic in a process known as quantitative easing (QE) to lower long-term interest rates, keep financial conditions loose and help spur demand, similar to the playbook used following the 2007-2009 financial crisis and recession.

It currently buys $80…

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