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this ppt explains FED tapering and its implications over India and other economies.


  • 2. CONTENTS Introduction Basics of quantitative easing Fed tapering Market reactions Impact on dollar and rupee Impact on indian economy Conclusion
  • 3. INTRODUCTION The word tapering in financial terms is increasingly being used to refer to the reduction of the Federal Reserve's quantitative easing, or bond buying programme. Taper talk" started in June 2013 by Ben Bernake when speculation increased that the Fed would start on a tapered end to QE in 2014.
  • 4. FEDERAL RESERVE The Federal Reserve System is the central banking system of the United States The Federal Reserves duties can be categorized into four general areas: Conducting national monetary policy Supervising and regulating banking Maintaining financial system stability and containing systemic risk. Providing financial services
  • 5. GOVERNMENT BONDS Governments and governmental agencies also use bonds to raise money. U.S. Treasury Bonds are the most secure investments. when bond yields go up, prices go down, and when bond yields go down, prices go up. In other words, a move in the 10-yearTreasury yield from 2.2% to 2.6% indicates negative market conditions, while a move from 2.6% to 2.2% indicates positive market performance
  • 6. The Basics of Quantitative Easing The Fed plays an increasingly active role. The most well-known of these tools is its ability to set short-term interest rates The central bank enacts a low-rate policy when it wants to stimulate growth, and it maintains higher rates when it wants to contain inflation.
  • 7. In recent years, however, this approach ran into a problem: the Fed effectively cut rates to zero, meaning that it no longer had the ability to stimulate growth through its interest rate policy. But even with these ultra-low rates, there's still too much unemployment. This problem prompted the Fed to turn to the next weapon in its arsenal: quantitative easing
  • 8. What is Quantitative Easing? Quantitative easing is by creating money and then buying bonds or other financial assets from banks. Higher loan growth, in turn, should make it easier to finance projects. The Feds purchases help drive up the prices of bonds by reducing their supply, which causes their yields to fall. Lower yields, in turn, provide the fuel for economic expansion by lowering borrowers costs.
  • 9. QE1 and "QE2 slow growth and high unemployment forced the Fed to stimulate the economy through its policy of quantitative easing in the interval from November, 2008 through March 2010. Fed announced an expansion of the program from $600 billion to $1.25 trillion on March 18, 2009. Immediately after the program wrapped up, trouble emerged in the form of slower growth, the rise of the European debt crisis, and renewed instability in the financial markets.
  • 10. QE-2 It involved the purchase of $600 billion worth of short-term bonds. This program - which Chairman Ben Bernanke first hinted at on August 27, 2010 - ran from November 2010 through June 2011. QE2 sparked a rally in the financial markets but did little to spur sustainable economic growth.
  • 11. QE3 Launched in September 2012 On September 13, 2012, the U.S. Federal Reserve launched its third round of quantitative easing It would keep short-term rates low through 2015. These moves reflect the Fed's view that the economy still hasn't reached the point of self- sustaining growth. The Fed has adopted what has been called "QE Infinity," a plan to purchase $85 billion of fixed- income securities per month, $40 billion of mortgage-backed securities and $45 billion of U.S.Treasuries.
  • 12. The Case Against Quantitative Easing The Feds various QE programs have led to sharp criticism Among the arguments against quantitative easing are: It helps banks more than the economy, since they can opt to strengthen their balance sheets by keeping the money rather than using it to increase their loan activity. By creating money, the Fed makes the U.S. dollar less competitive against foreign currencies. Increasing the money supply can create inflation.. Quantitative easing can create bubbles in asset prices
  • 13. TAPER TALK Global markets started experiencing a sell off after the Fed indicated that it expected to ease its asset purchases. On the day of Ben Bernanke's last press conference as chairman of the Federal Reserve the Federal Open Market Committee finally decided it would scale down its $85bn- a-month asset purchase programme
  • 14. 1st Market Reaction to Tapering While Bernankes tapering statement didnt represent an immediate shift, it nonetheless frightened the markets. Once the Fed begins to pull back on it stimulus, the markets may begin to perform more in line with economic fundamentals which in this case, means weaker performance. Bonds indeed sold off sharply in the wake of Bernanke's first mention of tapering, while stocks began to exhibit higher volatility than they had previously.
  • 15. 1st Market Reaction to Tapering The Dow was pushed down 105 points - but the idea of Fed stimulus has caused much more turmoil in certain overseas markets. The problem: A corresponding hike in U.S. debt yields has fueled higher borrowing costs around the globe. This has led to the flight of cheap capital out of emerging currencies and markets. The markets subsequently stablized through the second half of 2013 as investors gradually grew more comfortable with the idea of a reduction in QE
  • 16. That triggered the following reactions: The currencies of India and Turkey fell to new all- time lows against the U.S. dollar while bond prices fell. Indonesia's currency, the rupiah, also fell to its lowest level since 2009. Stocks in Eastern emerging economies like Indonesia, Thailand, and the Philippines plummeted. The Philippine Stock Exchange alone plunged nearly 6% this week.
  • 17. EFFECT ON EMERGING MARKETS Concerns over economic growth, along with lowered demand forecasts, have hammered export-reliant countries, likeThailand. Thailand's SET and Indonesia's Jakarta Composite Index have fallen 18% and 20% respectively since their May peak. The Philippine stock index is down 17%, whereas India's Sensex was down 10%. All four of these nations' currencies are down more than 10% in that time.
  • 18. EFFECT ON DOLLAR AND RUPEE The dollar gained against the majority of its 16 most-traded peers when the fed decided to taper From 53.80 a dollar on 30 April, the rupee slumped 21.84% to 68.85 on 28 August. If tapering releases the headwinds and interest rates rise within the context of a stable U.S. economy, then capital may be attracted toward the U.S. currency.
  • 19. FED TAPERING Fed will begin to wind down the size of its purchases before 2013 is over, with the goal of ending the program by 2015. At the time present, QE is fluid and subject to change based on economic conditions. This is illustrated by Fed Chairman Ben Bernanke's May 22, 2013 hint that the Fed could "taper" QE before year-end.
  • 20. FED FINALLY TAPERS ITS STIMULUS On December 18, 2013, the Fed announced the first tapering: beginning in