“With the initial financial market shock of COVID nearly twelve months behind, it's safe to say Canadian and U.S. monetary policy is now all about QE. As policy rates are anchored at effective lower bounds, it’s QE that will be subject to marginal tweaking first (i.e.before any rate hikes are in order). And please forgive us if you’ve heard us say this before, but relatively speaking, the Bank of Canada’s QE program is punching well above its weight vis-à-vis the Fed. As a share of population, GDP, national deficits, issuance or outstanding debt, the C$4 billion weekly pace at the BoC is more aggressive than the US$80 billion in monthly U.S. treasury purchases at the Fed.” (Taylor Schleich, National Bank Financial, February 16, 2021)

The financial markets are understandably quite preoccupied with the question, when will central banks (the US Fed and the Bank of Canada) start easing back of their stimulative quantitative easing programs?

Despite the recent wave of optimism over vaccine rollout and the passage of the exceptionally large $1.9 fiscal stimulus injection coming from the Biden Administration, the Fed and the Bank of Canada are both sticking to their super-easy monetary policy.

In the US, the Fed is adding Treasuries and mortgage-backed securities to its balance sheet at a rate of $120 billion a month, ($80 billion treasury bills, $40 billion MSBs), and has promised to keep doing so until it sees substantial further progress toward its goals of full employment and 2% inflation.

Nonetheless, some economists believe that given the large fiscal stimulus package and the reality that the vaccine rollout seems so successful, that the Fed may deliver a strong taper signal at its June meeting, and prepare the markets for a taper process to begin at the end of this year.

In terms of the potential QE tapering in Canada, the National Bank expects a near term paring back to shift to C$3 billion per week from the current C$4 billion pace.

Ironically, it is not widely recognized that the relative impact of QE in Canada is larger than the impact in the US when compared against either the size of the government fiscal deficit or of nominal GDP.

As well, because of the severity of the pandemic recession, the Bank of Canada has been financing a higher proportion of the new government debt than has been the case in the US.

(Click on image to enlarge)

(Click on image to enlarge)