published Dec 19, 2018, 5:14:57 PM, by Emily Barrett(Bloomberg) —

Traders seemed to agree that they didn’t like what they heard from the Federal Reserve at its final meeting for the year, but exactly what caused most offense in markets was less clear.

Stocks dropped and Treasuries rallied after the central bank defied pressure to refrain from raising rates, while investors dialed backed their pricing of the future interest-rate path. Fed officials also maintained a generally upbeat view of the economy even as they trimmed their own projections for future rate increases. Observers offered several possible explanations for the risk-off response in markets.

Markets Snubbed?

Some thought that the written statement from the Federal Open Market Committee didn’t sufficiently address mounting market strains, which have seen U.S. stocks hammered and bond yields tumble in recent weeks.

“The Fed is indicating that it’s listening to the markets, it has respect for the markets, but it’s not going to be ruled by the markets,” said Greg Staples, co-head of Americas fixed income at DWS, following the decision.

The press conference from Chairman Jerome Powell also did little to ease market disappointment. He noted that the FOMC “took on board the tightening in financial conditions,” but that it wasn’t focusing on any single market. What matters for the economy is broad changes that are sustained, the chairman said.

Concern Over Projections

Another concern, according to Columbia Threadneedle’s Gene Tannuzzo, is that the Fed hasn’t sufficiently downgraded its rate projections and is underestimating the growth challenges ahead.

“The reality is the market just doesn’t agree with their growth outlook,” Tannuzzo said in an interview following Powell’s press conference. He pointed out that the Fed’s summary of rate projections — known as the dot plot — is becoming a liability for the FOMC. This is because market participants continue to fixate on it as a prediction rather than as a scenario that’s subject to incoming data and the Fed’s changing economic outlook.

Balance-Sheet Unwind

A third concern is a general unease about the Fed’s unwind of quantitative easing, which some feel is a genuine threat to market liquidity. Guggenheim’s Scott Minerd attributed the stock market’s swoon to Powell’s apparent inflexibility on shrinking the balance sheet.

When Powell spoke about how he wouldn’t look at adjusting the pace of balance-sheet reduction “the market took a decided crack down,” according to Minerd.

Despite its more technical nature relative to the adjustment of the fed funds rate, the balance sheet has loomed larger among investors’ concerns of late. Ben Jeffery of Bank of Montreal attributed this increased focus in part to recent tweeting by U.S. President Donald Trump.

“The fact Trump mentioned the balance sheet earlier this week has brought it top of mind for a lot of people,” Jeffery said.

–With assistance from Alexandra Harris.To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net Mark TannenbaumCOPYRIGHT © 2018 Bloomberg L.P