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

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


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.


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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