Strategists had warned the market was braced for a very dovish Fed and stock traders had been hoping for a big bounce in the market after the Fed's move. But the Fed retained a comment in its statement that it would see "further gradual" rate hikes, and changed it only by adding the word "some." Fed watchers had expected the language to be removed and replaced by an indication that the Fed would be more dependent on economic data.
"There's a lot of nuance in the decision. I think what's pretty clear from the statement is Powell is not poised to turn sharply dovish," said Brian Dangerfield, macro strategist at NatWest Markets. "The Fed is going to be data dependent, but the data on which they are depending has not slowed dramatically."
The Fed had been expected to raise interest rates by a quarter point and signal fewer hikes in the future. It had also been expected to lower its growth forecast, and change the language in its statement to reflect it will be more dependent on incoming economic data. It did lower the growth forecast, and for 2019, it now sees growth at 2.3 percent instead of 2.5 percent.
Stocks sold off initially but then bumped around before spiraling lower again. The Dow and S&P 500 fell through the lows of the year and bond yields fell. The Dow closed 1.5 percent lower at 23,323, and the S&P 500 was off 1.5 percent at 2,506.
The 10-year yield was at 2.75 percent, its lowest level since April.
"It just reinforces that between the Fed hiking and shrinking its balance sheet, it's double tightening in 2019. I think it just reinforced the market did not get the dovish hike it was looking for," said Peter Boockvar, chief investment strategist at Bleakley Advisory Group.
Paulsen said the action in credit markets showed fear, with big moves in high yield and other corporate spreads.
"You take the combination of the stock market and the bond market and just look at the spreads...you have to say most of those are suggesting the fed is making a policy mistake here," Paulsen said.
Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management, however, said the market may be reading Powell wrong.
"I don't think they're seeing the dovish aspect of this. The bond market does," he said. "The Fed was bound to disappoint. They just couldn't be dovish enough. That's just the way it was set up. Do I think this is the correct response? No. I think this is the equity market saying they didn't cut their interest forecast the way they should have. There's disappointment…I read what Powell said as very dovish. The bar I think he set to hike was very high."
As expected, Powell did emphasize the Fed would not be on a preset hiking course. "From this point forward we are going to letting the data speak to us and inform us," said Powell, adding that that would make the path of tightening uncertain.
Powell's message was moderated and stocks came off the lows of the day when he said the Fed was at the bottom end of the range of estimates for the neutral rate.
Neutral is the level that is neither stimulative nor slowing for the economy, and there is much debate about where that level is. Powell also gave a nod to weaker financial conditions and said they played a role in the change in forecasts and interest rate expectations.