What is Monetary Policy Tapering?
Tapering
Forex Trading Glossary
Quick Answer: Tapering occurs when a central bank reduces asset purchases, signaling a shift away from emergency quantitative easing toward tighter policy.
What is Monetary Policy Tapering?
Tapering occurs when a central bank slows the pace of asset purchases or other quantitative easing programs. It signals a transition away from ultra-loose policy toward normalization.
Why Tapering Matters
- Liquidity shift: Reduced bond buying can push yields higher.
- Currency impact: Expectations of tighter policy usually support the domestic currency.
- Risk sentiment: Markets sensitive to cheap liquidity may wobble as the safety net shrinks.
Watch the Runway
Central banks telegraph tapering well in advance. Track speeches and meeting minutes to understand the timeline.
Trading a Taper Narrative
- Compare the pace of tapering across central banks to spot relative value opportunities.
- Monitor yield curves and currency basis swaps for confirmation of tightening expectations.
- Fade emotional reactions if tapering aligns with already-priced guidance.
- Adjust portfolio risk—carry trades and high-beta assets tend to underperform when taper talk accelerates.
Related Terms
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