(Bloomberg) -- The Federal Reserve leaned dovish during its latest policy meeting. Financial markets wanted more.
The S&P 500 tumbled to a 15-month low and investors flooded into Treasuries after Fed Chairman Jerome Powell signaled the central bank saw little threat to the economy from the recent turmoil on financial markets.
"It wasn't as dovish as they'd hoped," Peter Jankovskis, co-chief investment officer at Oakbrook Investments, said by phone. "Why are they continuing to do this given the volatility we have in the market? Why don't they sit and take a pause now?"
Here's how prices reacted across asset classes:
The S&P 500 turned higher after the Fed lowered its projections for rate increases next year to two from three. Then Powell began taking questions and the gains quickly evaporated. The chairman acknowledged that financial conditions had tightened but stressed that the recent turmoil is "a little bit of volatility." The index ended lower by 1.5 percent.
"Broadly speaking we don't look at any one market. We look at a really big range of financial conditions," Powell said. "What matters for the whole economy is material changes in a board range of financial conditions that are sustained for a period of time. Speaking in the abstract some volatility doesn't probably leave a mark on the economy, so we look for that. So what we've seen here is a tightening."
Stocks fell further after Powell suggested the balance sheet run down will remain on autopilot during the press conference.
"This was not a dovish hike as many were expecting and certainly hoping for," Peter Boockvar, the chief investment officer of Bleakley Financial Group, wrote in an email.
Following the decision, longer-dated bonds rallied, sending 10-year Treasury yields sinking through the 2.8 percent threshold, while 2-year yields also fell.
According to Priya Misra, TD head of global rates strategy, the spread between 5-year Treasury yields and 30-year yields could flatten further. The Fed's decision is "hawkish relative to rate-market expectations (Fed hiked and kept gradual in the statement)," she said.
The Fed also trimmed its growth forecast, lowering the median projection for GDP growth in 2019.
"They lowered expectations and the GDP number was lower just a hair so growth expectations have been lowered," Ryan Detrick, senior market strategist for LPL Financial, said in an interview. "It makes sense not to see yields spiking higher across the curve given that they lowered GDP numbers and the fact that they're looking at less rate hikes next year. Fed days are notorious for a lot of volatility."
The dollar rose on the Fed's decision to raise rates and press ahead with further gradual increases. The greenback had weakened ahead of the policy statement. The Bloomberg Dollar Spot Index, which tracks a basket of 10 leading currencies against the dollar, bounced back from as low as 0.4 percent to rise as much as 0.1 percent following the Fed's announcement.
"You wouldn't think it would," said Detrick. "My initial reaction would have been that the dollar would have more weakness," he said. "It's surprising to me. They said they won't hike rates as much -- higher trending rates can pull the dollar higher, higher yields can lead to a stronger dollar."
But the hike wasn't "super dovish," said Daniel Katzive, North America head of FX strategy at BNP Paribas, prompting the spike.
Sticking with the risk-off tone, credit default spreads on baskets of investment grade and high yield companies widened during the press conference. The Markit CDX North America Investment Grade CDS index is on course to close at a new two-year high and Bloomberg's HY All Sectors OAS index has also increased to the highest spread since 2016.
"Confidence needs to be restored and when we're in a meltdown like this, things have changed dramatically since September," Janet Brown, president and chief executive officer of FundX, said in a phone interview. "People are taking risk off and reallocating assets."
The biggest emerging-market equity ETF sank to a seven-week low and currencies pared gains after Powell's comments. Kyle Bass, the founder and chief investment officer of Hayman Capital Management in Dallas, warned that the U.S. and emerging markets are in trouble if policies don't get more accommodative, either from infrastructure stimulus or the Fed cutting rates.
"EM is flashing red and the U.S. leading indicators are all softening materially," Bass said. "The U.S. and EM are in trouble if we don't get more accomodative and add infrastructure stimulus and/or have the Fed actually cut rates.
(Updates charts throughout.)
--With assistance from Sydney Maki, Sebastian Boyd and Ben Bartenstein.
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