Tapering

Tapering is QE in reverse. (Not EQ; that's the thing you do with your car stereo to make the bass really annoy people at stoplights.)

Back up. What’s QE? QE = Quantitative easing, which is when a central bank buys government securities back from the market and banks to increase the money supply, encouraging lending and investing to stimulate the economy. Got it? Got it.
Tapering, like QE, is a slow process, like drip coffee. Drip. Drip. Drip.

The central bank (the Fed in the U.S.) buys government securities from the market at a slower rate, decreasing its bond-buying QE program and slowly winding down the money supply. If done too fast or at the wrong time, tapering could lead to a whoopsies recession. If done too late, it’ll just lead to inflation.

With the risks of messing up tapering, why bother? Well, quantitative easing is a tool for when the economy is down. In order to have QE available to use as a tool when it’s needed, a central bank needs to have government securities to buy back...and if it already bought them all from the last QE, the tool is unavailable.

Think about it like a lifeguard with a buoy: the lifeguard throws it out to help. If he wants to throw it out again next time, he needs to reel the buoy back first.

When the 2007-2008 financial crisis shocked the U.S. (and, um, the world), the Fed bought government securities back, increasing the money supply, as part of the government’s economic stimulus package. In order to use QE again in the future as an economic buoy, the Fed needed to reel that buoy back in via tapering.

They did in 2013, lowering the amount of securities purchased each month...as long as inflation and unemployment rates didn’t seem to notice too much. The Fed doesn’t want to cause another financial panic, so proceeding in a slow and steady manner, watching inflation and unemployment, is key to tapering like a pro.