The FOMC was bound to disappoint someone given the myriad outlooks for the outcome of Wednesday's meeting. And the reactions in the Treasury market and on Wall Street indicated policymakers disappointed many.
Yields on Treasuries surged on the 25-basis-point cut, with the 2-year note climbing nearly 20 basis points to 1.27%, while the Dow sunk nearly 100 points. Despite the fact that the Fed reiterated its divided statement and kept the door open for additional easing, the bond market was not soothed. Indeed, the more optimistic assessment of the economy relative to the May 6 statement suggested this could be the last cut unless data turn unexpectedly weak.
The Treasury curve narrowed about 6 basis points as further easing was largely priced out. Fed funds futures collapsed and now price in only about 25% chance of another quarter point cut by the Fall, from about 80% chance prior to the Fed announcement.
Adding to the heavy tone in bonds was supply. The Treasury's $25 billion 2-year sale suffered from its unfortunate timing ahead of the FOMC, while General Motors and its financing unit prepared its giant $13 billion offering. Meanwhile, stocks were disappointed; the Dow fell 98 points as the Fed wasn't as bullish on the economy as hoped.