Conventional wisdom held it would be difficult for the Federal Reserve to deliver a second dovish surprise in as many meetings. It was wrong, and the equity market didn’t quite know what to make of it.

Stocks initially erased losses on the prospect of rates not rising for the foreseeable future. Then the rebound faltered and equities closed slightly lower. It’s partly a reflection of how far they’d rallied on the first dovish turn, nearly 20 per cent so far this year. And it raised the question of what it’s going to take to reclaim September highs, if not a decidedly accommodative Fed.

Here’s what traders and strategists are saying:

  • Bryce Doty, senior vice president at Sit Investment Associates

Powell kept saying the economy was good -- but actions speak louder than words. They just stopped raising rates and cut balance sheet reductions short. That should have people worried. They see a major downgrade in economic growth, especially global growth. It’s tough to be too jazzed when that’s the outlook. It was odd. If all was going to stay the same, then why did they make such a significant change in policy? If everything’s so rosy then why cut balance sheet reduction short so quickly? You had people thinking you were pausing and now you’re done. It just doesn’t add up. People are scratching their head and going ‘What gives?’

  • Alec Young, managing director of global markets research for FTSE Russell

While stocks erased earlier losses after the Fed’s updated dot plot showed zero 2019 rate hikes down from two previously, investors shouldn’t get too excited given that a dovish Fed has been thoroughly priced into markets in the wake of a huge YTD rally. Equities still face significant headwinds including a possibly disappointing US-China trade deal, slowing global growth, low single-digit earnings growth and above-average valuations.

  • Chris Rupkey, chief financial economist at MUFG Union Bank

Monetary policy tightening and higher interest rates in one of the hottest job markets of all time? Forget about it. No more rate hikes ever. And it isn’t due just to increasing downside economic risks. It’s because the Fed is playing catch-up with its inflation target, reasoning that because inflation undershot the 2 per cent target for years, now they can let inflation overshoot the target for years and not need to raise interest rates to levels that could jeopardize one of the longest economic expansions in history. Inflation has been short-changed.

  • Yousef Abbasi, director of U.S. institutional equities and global market strategist at INTL FCStone

If they really wanted to err on the side of caution, they might’ve kept one rate hike in toward the back-end of 2019 or they might’ve pushed at least the balance sheet unwind out until the end of the year. That’s what really caught people by surprise. This kind of sucks for the yield curve and probably isn’t great for banks. Clearly they kind of threw their hands up on this one. It does feel like they are just saying, ‘Okay, this is it, this is our reality: sub-2 per cent growth probably in 2020, maybe this year and inflation nowhere to be found.’

  • Charlie Ripley, senior market strategist for Allianz Investment Management

It was a dovish surprise for most market participants who expected the Fed to maybe pick up with rate hikes again toward the end of the year. In terms of how the data has evolved, I think there has been a recognition that growth is slowing particularly relative to the fourth quarter. It seems like they’ve painted themselves into a little bit of a corner, not giving them any room to raise rates at the end of this year bearing that inflation starts to trend higher again.

  • Mark Heppenstall, chief investment officer at Penn Mutual Asset Management

I expected a more dovish tone and they didn’t disappoint. The change in the dot plot to zero is significant, for sure. That’s a pretty big change because they’ve turned pretty dovish since the beginning of the year and they’re turning even more dovish now. The reaction in markets is positive -- given the dramatic shift, I think to pivot the other way is going to be difficult. The market has been saying a cut is more likely than a hike. It seems as though their communication today is that they’re turning more in line with the market.

  • Jim Paulsen, chief investment strategist at Leuthold Group

Part of the reaction from the financial markets today from the Fed’s dovish pivot is they are moving a bit inflationary. Embedded inflation expectations in the 10-year Treasury Tips bonds are up since the announcement, the U.S. dollar index is down, WTI crude oil prices have risen to US$60, gold prices rallied, the CRB commodity price index is now higher on the day and energy stocks are leading the S&P 500 index today. Is a dovish Fed awakening some inflation concerns?