As 2018 ended, it appeared as if the Federal Reserve was intent on further interest rate hikes (after 4 in 2018). In addition to interest rate hikes, the Fed had hinted that the reduction in its balance sheet would continue, and was basically on “auto-pilot”. Both of these policies made investors fearful that the Fed would over-tighten monetary policy and cause the economy to contract sharply, with a distinct possibility of recession.
This year, one of the reasons the market reacted so strongly to the January Fed meeting was the abrupt pivot that the Fed signaled with respect to rate hikes. In a fairly dramatic change of tone, the Fed indicated in January that further rate hikes were “on hold”, and that at current levels the fed funds rate was nearing their “neutral” target (whereby monetary policy is balanced).