What is Fed Tapering🤔: The Fed, short for Federal Reserve, is the U.S.’ central bank. Tapering is the process of gradually reducing something. Fed tapering is the process of reducing the rate at which a central bank buys new assets (usually government bonds). You can think of tapering as the reversal of quantitative easing (QE), & the first step in winding down from a period of monetary stimulus.
What is Quantitative Easing🙄: In periods of economic downturns, such as the pandemic, banks reduce lending in fear that their loans will turn into non-performing assets (NPA). Central banks step in to increase the money supply in the economy by buying bonds in exchange for cash. QE helps keep interest rates low & inflation in check. Once desired targets are met, central banks start to reduce their acquisition of assets. Banks eventually have to taper their QE because continuing expansionary policies can lead to over-inflation and bubbles.
How does tapering generally affect markets👨🏾🤝👨🏼: Monetary policy – especially in the US – impacts global markets. Tapering often leads to ‘taper tantrums’, the term used to describe the collective panic that follows central banks reducing their QE programs. As central banks buy fewer assets, fears that liquidity would decline cause investors to fear the global market could crumble. Taper tantrums often lead to falling bond prices. There’s always the potential that shares and indices could follow, since the bond market is believed to support stocks.
How could potential tapering affect Egypt🧲: In August 2021, the Fed’s chairman hinted at the possibility of Fed tapering soon, citing that inflation targets have been met. Egypt’s minister of finance Mohamed Maait has expressed his confidence in Egypt’s capacity to withstand possible Fed tapering. Maait recalled Egypt’s experience with such a situation when more than $20 billion left the country in the past three years due to the pandemic & volatility of emerging markets. However, S&P Global Ratings has warned that Egypt’s over-reliance on borrowing has left it with a huge debt burden, & has stressed the need to obtain more funding from equity sources if the country is to withstand a rise in global interest rates.