By Adam Button
The Fed has done more in the past six weeks than any time in its history in a series of moves that has broken all pre-COVID-19 era rules. Wednesday's FOMC decision is a chance to outline the post-virus playbook. The Australian dollar was the top performer Tuesday while the US dollar lagged.
The US central bank has rolled out nearly 20 new programs since the epidemic, most of them with little scrutiny or long-term planning. Make no mistake, the Fed's actions saved the financial system but the fragility in the system was also a product of the past decade of central bank policy.
On the face of it, Wednesday's Fed announcement is less-important because it is unlikely there'll be any new policy actions, and certainly nothing major. But the guidance will be critical, right down to the tone.
The Fed is no-doubt cognizant at the risks of overshooting and setting up future problems. It's undoubtedly heard the criticisms about the truly astonishing pace of QE and bond-buying programs. This is a chance for them to tap the brakes and guide towards less-aggressive policy, even if that's months away.
There's also the possibility of guiding towards something like yield-curve control and Powell should face questions about debt monetization.
One major question is how much in US Treasuries the Fed will buy. The first QE foray during this crisis was capped at $500B, then the caps were removed and the Fed started buying $75B per day. That's tapered to $10B per day, which is still 7.5x the pace of QE3. There is little consensus on where this is going but given that long-term rates in the US are still at crisis bottoms, the market isn't expecting a big taper.
Much of the market reaction will come down to tone. We don't think it's a coincidence that the S&P 500 sits right at the key 61.8% retracement of the virus rout. The tone from the Fed up-to-now has been unambiguously supportive of all financial assets. Make no mistake, any hint of any limits at all could send the market into a tantrum.