The Fed had a chance to soothe the stock market today by doing “something dovish” with respect to monetary policy or even forward guidance. “Something dovish” might have looked like any of the following:
- abstaining from hiking rates (which was never really going to happen)
- making some adjustment to their reinvestment policy (slightly more within the realm of possibility)
- SAYING something reassuring about the economy and the friendly path of interest rates or bond-buying (totally possible)
The Fed did none of the above. In fact, they said disconcerting things about the economy (granted, nothing too severe) in their economic projections, calling for slower growth in 2019 and stagnant inflation. While they did decrease their rate hike outlook pace, it wasn’t by as much as the stock market would have hoped–especially in light of the downgraded view of the economy and increased monitoring of risks.
Bonds probably wouldn’t have cared either way. The Fed was roughly in line with bond market expectations. But stocks cared a lot! They set the tone for a strong bond rally as they fell to the lowest levels since October 2017.
By the end of the day, 10yr yields were as low as they’ve been since April 2018 (2.76%). This is probably the only pivot point everyone could agree on once 10s broke under 2.82% convincingly. The next one down would be 2.72%. MBS didn’t have nearly as nice of a day, rising only an eighth of a point in price compared to 10yr Treasuries rising more than half a point.