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Market Pulse: Bond market has `muted’ response to Federal Reserve decision, which is being read as dovish

After weeks of buildup, bond traders barely reacted on Wednesday as Federal Reserve officials penciled in a sooner-than-expected rate increase for 2022 and sent a strong sign that they are almost ready to start pulling back on monthly bond purchases.

The 2-year Treasury yield, the most sensitive to near-term interest rate moves, finally shot up briefly above 0.24% about 45 minutes after the Fed’s rate projections came out. Meanwhile, the widely followed 10-year rate fell below 1.30% to touch a New York session low following the Federal Open Market Committee’s decision — before bouncing back toward 1.33%, not far from where it was on Tuesday.

The reasons for the market’s relatively calm responses include the lack of a formal tapering announcement by the Fed, as well as a fewer-than-expected number of policy makers calling for a rate increase next year, investors said.

Read: Fed officials say tapering ‘may soon be warranted’ and earlier interest hike penciled in

“There’s still a lack of clarity around when officials will be tapering, and the market was looking for more members to move forward rate hikes to 2022,” Rob Daly, director of fixed-income at Glenmede Investment Management, said via phone.

See: Fed ‘dot plot’ signals higher U.S. interest rates in 2022, but Powell warns it’s not set in stone

In an email, Cliff Hodge, chief investment officer for Cornerstone Wealth, said “market reaction has been somewhat muted, as investors weigh a mixed message. The lack of a formal taper announcement is clearly dovish,” compared to what he regards as “a somewhat surprising hawkish dot plot, which now increases the odds of a rate hike in 2022.”

Stocks remained sharply higher in late trade Wednesday, with the Dow Jones Industrial Average
DJIA,
+1.00%

up more than 440 points, or 1.3%, while the S&P 500
SPX,
+0.95%

advanced 1.2%.

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