Rather than $15 billion, the Fed will reduce purchases by $30 billion every month. The unconventional monetary policy of buying assets is commonly known as quantitative easing. The term “taper” is becoming relevant again today because central banks are now looking at stepping back from the emergency monetary policy they launched during the coronavirus pandemic. The rationale behind tapering is to reduce the central bank’s balance sheet size and begin normalising monetary policy after years of extraordinary accommodation. The process of tapering by the central bank in India is a process whereby the central bank reduces the amount of money it is pumping into the economy.
The Cheap Money Exodus: Tapering and the Economy Ahead
To better understand this process and its importance, we now take a closer look at how quantitative easing works. In 2013, as economic recovery was underway, the Fed commented on its intention to slow its pace of asset purchases earlier than the market had anticipated. Fewer bonds in the market also cause investors to rebalance their portfolios by buying other types of assets – easing financial conditions and boosting economic activity.
Through the first five months of the year, the trade deficit in goods is $175 billion bigger than it was at this point last year ($650 billion as of May 2025 compared to $475 billion in May 2024). It may come as a surprise that tariffs have almost no effect on the trade deficit, according to economic theory. It essentially results in a country’s trading partner having less money to buy the tariffing country’s goods. In more complex models, tariffs raise the cost of inputs that go into exports and prompt retaliation that directly reduces exports. With no new deals announced as his self-imposed deadline loomed, President Trump posted on Truth Social that countries would conclude their U.S. trade deals by noon on July 7 or receive a letter with their new tariff rate. On November 3rd, 2021, the Federal Open Market Committee (FOMC) announced a well-anticipated yet nevertheless game-changing policy change.
Revenues will also taper off, effectively by design, if two other Trump objectives are achieved. One stated goal of the tariffs is to encourage U.S. and foreign companies to produce more goods in the United States. If this works and imports fall as a result, tariff revenues will also decline.
When they have achieved their goal of economic recovery, central banks will gradually “taper” or scale back their asset purchases. Tapering impacts the supply of such securities and can move not just the bond markets in the U.S. but also stock markets around the globe. From June 2020 to October 2021, the Fed bought $80 billion of Treasury securities and $40 billion of agency mortgage-backed securities (MBS) each month.
The Federal Reserve and Monetary Policy
- From June 2020 to October 2021, the Fed bought $80 billion of Treasury securities and $40 billion of agency mortgage-backed securities (MBS) each month.
- Indications that the Fed is beginning to taper can produce significant changes in prices for stocks and other assets.
- If, in fact, a central bank declares that the expansionary monetary policy and the injection of liquidity into the economic system is about to end, the reaction of the markets could be explosive.
- This is because importers—particularly importers of pharmaceuticals from places like Ireland, Singapore, and Switzerland—rushed their drugs into the United States in advance of the tariffs.
- But losing access to something you never truly had is not a terrifying prospect.
If tariffs price American-made goods out of international markets, manufacturing jobs could shrink instead of grow over time. It’s way too soon to fully understand these financial ripple effects—after all, U.S. trade policy continues to forex analysis and forecast evolve. Further, financial market outlooks must incorporate a myriad of other factors like fiscal and monetary policy trends as well as technological innovation, asset valuations, and investor positioning.
How Tapering Affects Financial Markets
Adding more factory jobs would mean pulling employees away from other sectors, and this will be harder than it seems. A survey from Deloitte and the Manufacturing Institute finds that Americans rank manufacturing jobs fifth out of seven industry career choices, preferring technology, healthcare, energy and other fields. Shifting supply chains can take months—or years—depending on the industry. Textiles, for example, tend to move faster due to fewer suppliers, shorter seasonal contracts, and less regulation. In contrast, autos are among the slowest to shift, as all of the “Big Three” American carmakers (Ford, General Motors, and Chrysler) have locked-in contracts with parts and component makers through 2028. Aerospace and pharmaceuticals can take years to open new factories due to intricate regulatory procedures and approvals, given safety concerns.
Federal Reserve Tapering and Financial Assets
In June alone, tariff revenues were $28 billion, a new record and more than four times the amount collected in the same month last year. The Urban-Brookings Tax Policy Center estimates that tariffs will generate a total of $189 billion in 2025 and nearly $360 billion in 2026. It is still too early to fully measure the effects of tariffs on U.S. national security. Any benefits may well take longer to materialize, given that supply chains can take years to adjust.
Where Was Tapering Evident in Response to the 2007-2008 Financial Crisis?
In the United States, the Federal Reserve will also reduce its asset holdings. Since the Fed controls the nation’s money supply, it can pay for its bond purchases with newly created money, thereby increasing the total supply of money. As the economy recovers, aided by business and household spending supported by the availability of inexpensive credit, the Fed needs to contemplate whether quantitative easing could create too much money.
- Tapering is all about withdrawal from the monetary stimulus program which has been executed and quantitative policies.
- If President Trump had used tariff revenue to drive a significant fiscal consolidation that reduced the budget deficit, he could have conceivably brought the trade deficit down as well.
- That uncertainty could be viewed negatively and thus cause put downward pressure on stock prices.
Will Tariffs Reduce the U.S. Trade Deficit?
In short, the function of tapering is to normalize monetary policy which had to intervene with ad hoc tools (Quantitative Eaasing) to relieve a crisis situation. In fact, given a country in economic recovery, with demand and investments recovering, continuing to inject large amounts of money could be counterproductive and drive up prices. The first step in the tapering process will be taken in mid-November, when the Fed will reduce the pace of purchases. In particular, it announced that it is decreasing the amount of Treasury and MBS purchases in November and December. The FOMC statement also suggested that there could be further reductions in coming months if the economic outlook continued to improve. When the Fed purchases securities, its holdings increase while those of the private sector decrease.
Since tapering can signal to markets that the Fed is shifting to a less accommodative policy stance in the future, this could lead to a rise in long-term rates, as occurred during the taper tantrum. Tapering can impact long-term interest rates through both its direct effects on bond markets and the signal it provides about the Fed’s future policy intentions. Tapering is the gradual slowing of the pace of the Federal Reserve’s large-scale asset purchases.
Here’s some background on how the Fed’s actions help the economy, why the Fed buys securities, what types of securities the Fed buys and how tapering will work. The Brookings Institution is committed to quality, independence, and impact.We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s). Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest. The question is whether Trump’s tough approach came at an acceptable cost.