Monetary Policy Shifts from the BoC and Fed: What They Mean for Your Investments

Since mid-2024, Canadian and U.S. monetary policies have moved in increasingly different directions. The Bank of Canada began cutting rates in June as domestic growth slowed and trade risks intensified. By January 2025, it formally ended quantitative tightening, shifting toward providing liquidity. In contrast, the Federal Reserve has taken a more gradual approach - cutting rates three times and recently announcing it will slow the pace of its balance sheet runoff starting in April 2025.

Figure 1: Bank of Canada vs. Federal Reserve Target Rate (Jan 2024 – Mar 2025)

At the core of these policy decisions lies the way central banks use their balance sheets to influence financial markets. Quantitative easing (QE) involves large-scale purchases of assets such as government bonds or mortgage-backed securities to inject liquidity and lower borrowing costs when interest rate cuts alone are insufficient. In contrast, quantitative tightening (QT) allows assets to mature without reinvestment, pulling liquidity out of the system and tightening financial conditions. 

In Canada, BoC has ended its QT program but is not restarting large-scale QE. Instead, it has resumed overnight repos - short-term lending secured by government bonds - to maintain liquidity and keep short-term rates aligned with its policy rate. Later this year, the Bank plans to gradually rebuild its holdings of Government of Canada Treasury bills by participating in primary market auctions. This is intended to restore a more balanced mix of assets on its balance sheet after the reduction caused by QT, without reintroducing the broader market impact of bond purchases associated with QE.

The Federal Reserve is continuing its QT but will slow the pace starting in April. It plans to reduce the monthly runoff of U.S. Treasury securities from $25 billion to $5 billion to keep more liquidity in the banking system. This adjustment is meant to prevent market disruptions without shifting toward QE. Meanwhile, the Fed will allow mortgage-backed securities to keep maturing and rolling off the balance sheet at the current pace, meaning it will not reinvest the proceeds as these assets are paid down. This reflects the Fed’s focus on reducing its balance sheet while keeping pressure on inflation.

Figure 2: Total Assets of the Bank of Canada and the Federal Reserve (Jan 2024 – Mar 2025)

For investors, the growing divergence in monetary policy is starting to affect markets in both countries. In Canada, rate cuts combined with renewed liquidity injections through repos are putting downward pressure on bond yields, reflecting easier credit conditions. Sectors sensitive to borrowing costs, such as financials and real estate, could benefit from lower rates. However, the Canadian dollar remains under pressure as the gap between Canadian and U.S. interest rates widens.

In the U.S., the Fed’s decision to slow QT may ease some upward pressure on long-term bond yields, providing limited support to equity markets. Still, because the Fed is not restarting quantitative easing (QE), the impact on liquidity and asset prices is expected to remain contained.

Figure 3: 10-Year Government Bond Yields for Canada and the U.S. (Jan 2024 – Mar 2025)

As this divergence continues, the way each central bank manages liquidity - whether through repos, Treasury purchases, or balance sheet reductions - will remain a key driver for bonds, equities, and currencies. Investors should stay mindful of how these shifts influence yield opportunities and fixed income performance in the months ahead.

If you would like to discuss how these developments could affect your portfolio, please contact us at +1.604.643.0101 or cashgroup@cgf.com.