To combat the economic slowdown due to covid, the Fed had in March 2020 cut interest rates to near zero and started its $120 billion in monthly asset purchases. The tapering will represent a major step in monetary policy normalization.
In recent history, the US had adopted the quantitative easing strategy after the global financial crisis of 2008. The easing programme continued for five years and the Fed began tapering in 2013, which caused a major sell-off in the market.
“The tapering programme (in 2013) came as a surprise to the financial markets and hence caused a knee-jerk reaction. The US stock markets saw volatility and sell-offs, but they eventually recovered. The biggest impact was on emerging markets (EMs) because foreign investors reallocated their funds to the US after withdrawing funds from the stock markets in these countries,” said Viram Shah, co-founder and chief executive officer, Vested Finance.