A few years ago the US Federal Reserve put in place “quantitative easing”. Essentially this process involved the Federal Reserve purchasing assets in an attempt to drive down long term interest rates which in turn encourages investors to spend rather than invest their money. In short, it was hoped this would kick-start the US economy into action after the effects of the Global Financial Crisis.

We are not talking small numbers here either – until recently the Federal Reserve was purchasing up to $85 billion dollars of assets a month.  Now that the US economy is beginning to strengthen, the US Federal Reserve has informed the market that it will begin scaling back or “tapering” its asset purchases.

Initially they tapered by $10bn per month and then another $10bn after that. It is thought that they will continue doing this until the quantitative easing program is completely wound up.

What impact does this have?

The US economy is the world’s largest economy. As such investors see it as somewhat of a safe haven for money and investments. However with US rates at an all-time low there was not much incentive to invest in the US. As a result, investors directed money to other countries where they could obtain a more competitive rate on their funds.

The decision to begin tapering is a clear sign that the US economy is beginning to improve – which in turn could see interest rates in the US increase over time.

With the prospect of increasing rates, the US has once again become an attractive investment. As a result we have seen large amounts of money withdrawn from countries around the world. Australia has not been immune to this outflow of funds given the relative strength of our economy and the exchange rate softening the blow.  It is not expected that the tapering will have a large impact on our economy at all.