# Understanding the 2013 Taper Tantrum: Causes and Market Impact

> **Definition**
>
> The taper tantrum was the 2013 spike in U.S. Treasury yields triggered by the Federal Reserve's announcement to reduce its bond purchases as part of its quantitative easing policy.

## What Is the Taper Tantrum?

The phrase taper tantrum refers to the 2013 surge in [U.S. Treasury](https://www.investopedia.com/terms/u/ustreasury.asp) yields, resulting from the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp)'s (Fed) announcement of [future tapering](https://www.investopedia.com/terms/t/tapering.asp) of its policy of quantitative easing. By reducing the pace of its purchases of Treasury bonds, the Fed reduced the amount of money it was feeding into the economy. The market reaction and investor panic led to a temporary rise in yields. Although initial fears were that the market would crumble, those fears faded after the Fed clarified the policy adjustments.

### Key Takeaways

*   The 2013 taper tantrum was a market panic sparked by fears of the Federal Reserve reducing its bond purchases.
*   Investor concerns arose from the belief that ending quantitative easing could destabilize markets.
*   Despite initial fears, markets recovered as the Fed continued bond purchases and boosted investor confidence.
*   The panic highlighted the market's heavy reliance on the Fed's quantitative easing for stability.
*   There was no actual reduction in the Fed's bond purchases at the time, only an announcement of potential future changes.

![Taper Tantrum](https://www.investopedia.com/thmb/rGFy_I_zwzg98Rr0SHl6-7ziHo4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/taper-tantrum-resized-3e233c79074e46ba8c73a4eac3bc5c00.jpg)

*— Investopedia / Laura Porter*

## Exploring the 2013 Taper Tantrum: Causes and Insights

In response to the 2008 financial crisis and recession, the Federal Reserve used a policy called quantitative easing (QE). This involves buying large amounts of bonds and other securities to increase liquidity, stabilize the financial sector, and promote economic growth. This stability encouraged lending, which allowed consumers to spend and businesses to invest. Historically, quantitative easing has been viewed as a short-term fix because it could lead to falling dollar values and hyperinflation.

Traditional economists would insist that when the Federal Reserve feeds the economy for too long, there are unavoidable consequences. Tapering, which gradually reduces the amount of money the Fed pumps into the economy, should theoretically incrementally reduce the economy's reliance on that money and allow the Fed to remove itself as the economy's crutch.

Since 2015, the Fed has found ways to add cash into the economy without lowering the dollar's value. Tools like the repurchase window may be part of a new chapter in macroeconomic policy, but it will take years for experts to judge their effectiveness. However, investor behavior always involves not just current conditions, but expectations of future economic performance and Fed policy. If the public gets word that the Fed is planning to engage in tapering, panic can still ensue because people worry that the lack of money will trigger market instability. This is particularly a problem because the market has become more dependent on continued Fed support. 

## Key Factors Behind the 2013 Taper Tantrum

In 2013, Federal Reserve Chair [Ben Bernanke](https://www.investopedia.com/terms/b/benbernanke.asp) announced that the Fed would, at some future date, reduce the volume of its bond purchases. In the period since the 2008 financial crisis, the Fed had tripled the size of its balance sheet from around $1 trillion to around $3 trillion by purchasing almost $2 trillion in Treasury bonds and other financial assets to prop up the market. Investors had come to depend on the ongoing massive Fed support for asset prices through its ongoing purchases. 

This prospective policy of reducing the rate of Fed asset purchases represented a massive negative shock to investor expectations, as the Fed had become one of the world's biggest buyers. As with any reduction in demand, with reduced Fed purchases (bond), prices would fall. Bond investors responded immediately to the prospect of a future decline in bond prices by selling bonds, depressing the price of bonds as a result. Of course, falling bond prices always mean higher yields, so yields on U.S. Treasuries shot up. 

It is important to note that no actual [sell-off](https://www.investopedia.com/terms/s/sell-off.asp) of Fed assets or tapering of the Fed’s quantitative easing policy had occurred at this point. Chair Bernanke’s comments referred only to the possibility that at some future date the Fed might do so. The extreme bond market reaction at the time to a mere possibility of less support in the future underscored the degree to which bond markets had become addicted to Fed stimulus. 

Many pundits thought the stock market might also fall because Fed bond purchases were seen as supporting stock prices. If the market reacted negatively to tapering, it could harm the economy. Instead, the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp) made only temporary declines in mid-2013.

## Stock Market Resilience Amid the Taper Tantrum: Understanding Why

There were many reasons for the stock market's continued health. For one, following Chair Bernanke’s comments, the Fed did not actually slow its QE purchasing, but instead launched into a third round of massive bond purchases, totaling another $1.5 trillion by 2015. Secondly, the Fed professed a strong faith in market recovery, boosting investor sentiment and actively managing investor expectations through regular policy announcements. Once investors realized that there was no reason to panic, the stock market leveled out.