On Tuesday, Federal Reserve Chairman Jerome Powell testified in front of Congress. He said that the Fed would likely speed up the timeline for “tapering” quantitative easing.

But that’s left all the non-economics nerds out there wondering…what the heck is “tapering” and “quantitative easing”?

Well, if you asked that question to yourself, you are not alone.

Fed-speak is a dialect of its own, and very few are versed in it, so don’t feel bad.

At the Congressional hearing, Chairman Powell said, “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.”

These comments sent the market into full-on freak-out mode!

Investors don’t like when the Fed deviates from their stated plans for monetary policy, and the Dow subsequently dropped 600 points at one point during trading.

So, back to our original question: “What is quantitative easing and tapering?”

Quantitative easing is Fed-speak for increasing the money supply to the economy and lowering interest rates to spur economic growth.

The Fed first took this approach following the financial crisis of 2008-2014.

“How does the Fed do this?” you might ask.

Simply put, the Fed buys longer-term securities from the open market which adds money to the economy to encourage lending and investing. It also ballooned the Fed’s balance sheet, which now stands at over $8 trillion.

So, you also might ask: “What are these long-term securities of which you speak?”

Also a good question.

The Fed buys government-issued Treasury bonds from the open market, as well as mortgage-backed securities to send money into the economy.

You might recall mortgage-back securities with trepidation if you lived during the financial crisis from 2007-2009…but that is a story for another day.

The Fed undertook the latest round of quantitative easing in March of 2020 in the early days of the coronavirus pandemic because many businesses closed, and many employees were let go, furloughed, or otherwise became unemployed.

The Fed committed to purchasing $80 billion of Treasury bonds and $40 billion of mortgage-back securities to boost demand and to encourage investment during the dark days of the pandemic.

So, what is tapering?

Well, that is simple enough to explain.

It is simply reducing the amount of Treasury bonds and mortgage-backed securities the Fed intends on purchasing each month.

During his appearance before Congress, Chairman Powell said that the Fed will likely speed up the reduction of these purchases each month. He is speeding up the time frame, and the market wasn’t expecting this given the Fed’s stated plans from their last Federal Open Market Committee meeting.

And there you have it, folks. Hopefully, this was helpful. Fed-speak isn’t always the most exhilarating conversation, but these are the words that drive the economy around us, so it’s important to know what they mean.

I don’t suspect it will come up in conversation over a pint at your local watering hole.

But if it does, you can drop the knowledge on the boys at the bar.