Tapering or reducing the rate of asset purchases is a condition in which central banks in major economic crises initiate expansionary policies by directly injecting money into the market; This cash injection occurs through a policy called quantitative easing or QE. In this policy, stocks, treasuries, and companies are bought directly by the central bank, thus injecting more money into the economic chain; But after a while the economy flourishes and the flow of the economy gradually approaches normal conditions The Federal Reserve is reducing its expansionary policy and has begun reducing the amount of monthly bond purchases, a process known as tapering.
What does tapering mean?
In essence, Tapering is an economic policy that can be applied to all financial markets. The effect of the Federal Reserve’s statement on digital currencies stems from issues such as tapering and bank interest rates. For example, you often hear in economic news that the US Federal Reserve is pursuing a tapering policy. The Federal Reserve (Federal Reserve) is the central bank of the United States, sometimes called the Fed for short. The reason for the importance of the Federal Reserve’s decisions and policies is almost obvious because a large percentage of business activities in the world and countries’ imports and exports are conducted with the benchmark currency of the US dollar. Therefore, any policy changes related to the US dollar directly and indirectly affect other countries and economies in addition to the US economy.
How is Tapering done?
When problems and economic problems arise in each country, people find it difficult to maintain businesses, unemployment increases and wages decrease. Currently, governments are moving towards increasing expansionary policies. Exercising expansionary policy will allow the central bank to buy more each month and provide more money to society. Quantitative Easing or QE is one of these expansionary policies. Due to this influx of cash, bank interest rates will fall and people can borrow to improve and expand their businesses. But with the continuation of expansionist policies, inflation is created.
The American government, the central bank and the Federal Reserve constantly monitor their financial and economic indicators after starting expansionary policies to stop the growth of inflation by using the Tapering policy at the right time. It is used to stimulate the country’s economic growth by keeping the loan level low, and Tapering reduces the rate of economic growth by cutting off the stimulus from the country’s economy. QE and tapering have opposite functions, but both are tools of economic regulation, and through them the Federal Reserve accomplishes both its tasks of maximizing employment and price stability.
Tapering increases interest rates and unemployment, but at the same time reduces inflation, money flowing out of the system, and affordable living costs. When the money supply is limited, lenders are more likely to choose to lend to some people at higher interest rates. This selective lending creates competition and increases interest rates.
How tips affect the cryptocurrency market
As we said, Tapering policy is related to changes in interest rates and reduces people’s ability to earn money. In fact, money depreciates over people’s life cycles. These changes can effect various markets including stocks, cryptocurrencies and commodities. Rising bank interest rates usually cause the crypto market to fall as investors put their capital into more stable markets and leave risky markets like the crypto market. However, in most cases, these policies do not cause a one-time market crash and sometimes, due to a continuing financial crisis, these policies are implemented in stages. Like the Corona crisis that affected the market for a long time, its impact is still visible.
Often, the money market tapering leads to anger, which refers to the collective anger of the people after the reduction of the QE program. When the central bank buys fewer assets, the fear of reduced liquidity makes investors fear a collapse in global markets. In general, the narrowed tantrums affect communication. When the price of these bonds decreases, the yield increases. There is always the possibility that stocks and indices follow bond price trends. However, this has not been the case in previous reduction situations.
Relationship between economic crisis and Tapering
When an economic crisis occurs, unemployment increases, people’s incomes decrease and the economy shrinks. The economic and banking officials of the countries are trying to prevent this crisis and reduce its impact by reviewing monetary and financial policies and using various tools. For example, as we mentioned in the previous sections, during the Corona pandemic, the US government started implementing fiscal policy and lowered the interest rate. These are expansionary policies.
Expansionary policy forces the central bank to buy more assets and inject more money into the market. When more money enters the market, people will return to the economic cycle, they can have economic activity and jobs will be preserved. On the other hand, the value of money is falling and we are facing inflation. But usually once the crisis is over, this policy will be put on hold to prevent the country from falling into inflation. After a while, contractionary policies are used to inject excess money into the market, which is Tapering.
Maybe in the past, many people did not have a special idea about Tapering, but today and according to the special economic conditions of the society, it is easy to understand whether to apply it or stop it. In fact, the financial policies of governments have a direct effect on our quality of life today, and it cannot be denied in any way. Tapering is a monetary policy temporarily implemented by central banks during economic crises.
An important point is the impact of Tapering in the digital currency market. When the Tapering starts, the digital currency market usually goes down, and this should be taken into account when investing and buying and selling. In Tapering situations, money tends to flow from high-risk stocks, such as the cryptocurrency market, to low-risk stocks.