Taper Tantrum

Your toddler asks for candy. You say "no." They let go a piercing screech that seems liable to break glass. From there, the scream wanes a bit until it settles into a simple crying fit. Eventually, it dwindles down to a quiet whimper. One form of a taper tantrum.

Another kind describes an event in Wall Street history. In the economic downturn that followed the 2007-2008 financial crisis, the Federal Reserve had to take dramatic steps to avoid a complete systematic collapse. They were worried about a new Great Depression and, as such, took unprecedented action. Once Fed officials cut interest rates to what amounted to a 0% rate, they added the tactic of quantitative easing. This move added liquidity to the system, providing additional fuel for the economy. Things still got pretty bad over the next few years. But, eventually, the Great Recession started to ease, and the Fed was looking to get a little bit closer to normal.

Fast-forward to 2013. The Fed wants to ween the economy off the quantitative easing. As as result, it announced that it would begin tapering the program...taking it off slowly so that monetary policy could get back to regular operations.

The market reacted badly. The Taper Tantrum. It led to a panic in the treasury market, as evidenced by a sudden spike in Treasury yields. However, like the typical tantrum thrown by a little kid, the initial response eventually faded. The markets whimpered for awhile, but the Fed was able to push forward with its tapering program, returning U.S. central bank policy to something approximating normal.