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What is tapering?

What is tapering?

Five years ago, tapering wasn't a familiar phrase on Wall Street.

Tapering is reducing and pulling back on the extraordinary measures that were put in place during the financial crisis of 2008. Federal Reserve officials don't use the phrase "taper." Instead, they refer to it as reducing the pace of its bond-buying program-- commonly referred to as QE. The Fed is currently funding billions every month through this stimulus program.

Tapering should not be confused with "tightening" though, because the two are not mutually exclusive.Tightening is the Fed raising interest rates to control inflation. The Fed often tightens to rein in economic growth that could overheat.

Investors care about tapering because a sharp rise in stock prices has accompanied the asset-purchasing program.