A taper tantrum is a market panic in response to news about the central bank’s policy aimed at reducing its monetary activity which has an impact on a spike in government bond yields. An example of a taper tantrum is when the Federal Reserve was planning a policy in 2013 when investors or capital owners were busy withdrawing their funds from the bond market, so bond yields jumped dramatically. However, once the market realized there was no reason to panic, yields slowly returned to normal. This taper tantrum is interesting to observe, because in reality it is an economic phenomenon related to its influence on a country’s currency exchange rate. This taper tantrum symptom has only recently begun to appear, especially in developing countries such as Indonesia and other developing countries in Asia.
Taper Tantrum is an instantaneous effect due to the monetary policy of the US government.
An example of the Taper Tantrum is the spike in 2013 when the FED announced a reduction in its Quantitative policy, namely by reducing the volume of purchases of US bonds/treasuries with the aim of reducing the amount of money for the economy.
The immediate impact was the exchange rate of developing countries’ currencies which immediately fell even though the announcement of an increase in interest rates by the US government had not been carried out, causing panic because investors were afraid the market would collapse due to the QE termination even though the market would continue to recover after the program started.
The Taper Tantrum policy is closely related to the US Government, namely the FED and the central bank in raising/lowering interest rates, which policy greatly affects the currency conditions of other countries, especially developing countries, that is the reason why the influence of taper tantrums is very strong and lately often felt by developing countries.
The taper tantrum is an economic stimulus carried out by the American Central Bank in the form of a policy of increasing the benchmark interest rate successively which causes the exchange rate of other countries to experience instability or experience a weakening condition and to anticipate this, countries affected by the negative impact are forced to carry out similar policies, namely participate in raising interest rates to anticipate the decline in the value of the currency exchange rate. In fact, the policy of increasing interest rates can cause a weakening of export competitiveness, decrease investment rates, and reduce productivity in the private sector.
The condition of the Taper Tantrum can be anticipated as early as possible if the government and the Monetary Authority (Central Bank) always maintain their economic performance with a number of appropriate policies as it is today due to the weakening global economy, trade wars and declining world oil reserves due to the stop of the Aramco oil refinery in Saudi Arabia. operates temporarily even though it supplies almost 25% of the world’s oil.
The steps taken by the Fed’s taper tantrum policy can be prevented by doing the following:
• First, maintain and monitor inflation conditions to keep them under control
• The second does not follow the policy of increasing interest rates if the United States increases interest rates and US bond yields.
• Third, the position of foreign exchange reserves must be maintained and always higher.
• Fourth, the condition of the trade balance is a surplus which is marked by an increase in exports compared to imports.
• Five Conditions Stable economic growth that enhances the positive image of investors.
• Sixth, Maintaining Stability of Currency Exchange Rates by always conducting market interventions and operations.
Please note that the term Quantitative Easing before Taper Tantrum
Every economy can slow down at some point in time..
In order to improve the country’s economy, the Central Bank may adopt different strategies..
The aim is mainly to increase the flow of money into the market which will be invested to increase economic output (Quantitative easing)..
Now money can be pumped into the market in many different ways..
Maybe by lowering the interest rate (Repo rate) that will be passed on by the bank, buying securities and others..
However, pumping money into the market for a long time is not a long-term solution to the problem because it can lead to high inflation in the market if the economic output does not increase in proportion to the increase in cash flows to the market.
Suddenly stopping a quantitative easing program is also dangerous, as the stock and bond markets are rather volatile..
It is reactive and certainly not a good indicator of the economic health of an economy..
If QE is totally capped, money will start flowing out of the bond market which will result in high bond yields..
So, to avoid this situation the Central Bank generally lowers QE..
Suppose the central bank buys Rs. Securities value 10k this year then next year buy Rs. The value of the security is 8k and so on until it doesn’t put money into the economy and can support itself..
This is called TAPERING (Limiting a quantitative easing program in stages)
In reaction to the 2008 financial crisis and subsequent recession, the Federal Reserve implemented a policy known as quantitative easing (QE), which involved large purchases of bonds and other securities. In theory, this increases liquidity in the financial sector to maintain stability and promote economic growth. Stabilizing the financial sector encourages lending, to enable consumers to spend and businesses to invest.
The taper tantrum refers to the 2013 collective reactionary panic that sparked a spike in US Treasury yields, after investors learned that the Federal Reserve is slowly putting a pause on its quantitative easing (QE) program.
The main concern behind the taper tantrum stems from the concern that the market will collapse, as a result of the QE halt.
In the end, the panic taper tantrum cannot be justified, as the market continues to recover after the easing program started.
Taper tantrum is a term that describes the big impact of the release of the FED’s monetary policy which resulted in the collapse of currency exchange rates in developing countries, even though the impact was immediately felt even though the monetary policy had not been published. by continuously raising interest rates, resulting in a decline in exchange rates in other countries around the world, especially the worst is the decline in currency exchange rates in developing countries including Indonesia, especially with the trade war between America and China Of course, this will worsen the condition of the currency exchange rates of developing countries whose economic conditions are indeed not stable.
The great thing is that the taper tantrum psychologically causes psychological panic for developing countries and it is certainly quite disturbing the performance of the central banks of developing countries, which in the end have to work extra hard to always maintain and control the inflation rate and foreign exchange reserves.