Traders on Wall Street cheered on Wednesday when Federal Reserve Chair Jerome Powell signaled he didn’t see oncoming interest-rate hikes despite inflationary pressures. The celebration didn’t last long.

For a brief period, US stocks popped to unleash the biggest post-policy meeting rally since December, while Treasury yields tumbled more than 10 basis points across maturities. The relief trade kicked in when Powell told reporters “it is unlikely that the next rate move will be a hike.”

Problem is, Powell didn’t explicitly signal a rate cut was coming this year either, and said it will probably take longer for central bankers to gain enough confidence in the downward trajectory of inflation to consider easing policy. That reality check triggered an abrupt reversal in equities, which ended lower on the day. Treasury yields trimmed some of their decline, with the policy-sensitive two-year yield holding below the 5% threshold — but not by much.

“Powell made it clear that the hurdle for hikes is incredibly high,” said Michael de Pass, global head of rates trading at Citadel Securities. “They ultimately view the level of rates as being restrictive, that’s undeniable. Are they restrictive enough and how long does it take to filter through to the economy are the questions now.”

The fact that the market reacted at all to the idea that rate hikes are likely off the table shows how much sentiment has shifted from the start of the year, when the consensus called for multiple rate cuts and an expected steady downtrend in inflation. Forecasts for higher interest rates were few and far between.

Lately, though, investors — particularly in the world of Treasuries — have had cause to worry about a potentially hawkish pivot from the Fed as the US economy has remained resilient, with job creation running strong and inflation proving harder to tame. Bond traders have slashed the outlook for rates cuts to a little more than one from six quarter-point slices at the start of January. 

A selloff in equities and bonds during April that drove two-year Treasury yields back over 5% and sent the S&P 500 Index tumbling to its worst monthly loss since October illustrates the tension that was building up ahead of this week’s Federal Open Market Committee meeting. And potentially pivotal data is still on deck: The April jobs report on Friday is forecast to show robust jobs growth, while more inflation reports are due in coming weeks. Central bankers will need to weigh it all.

“The FOMC seemed intent on not letting the market run too far from its base case of solid growth, sticky inflation and intent to cut later this year,” Citigroup Inc. strategists led by Stuart Kaiser wrote in a note, referring to the policy-setting Federal Open Market Committee. “The result was a large round-trip trading day.”

The stakes for investors were highlighted by Powell when he said that while he believes current rate policy “is restrictive, and we believe, over time, it will be sufficiently restrictive,” it “will be a question that the data will have to answer.”

Even as Powell acknowledged the lack of recent progress toward the Fed’s 2% inflation goal this year, his signaling that cuts are more likely than hikes was enough to soothe the market, at least initially. Whether it warrants a sustained stock rally is another matter.

“I was more puzzled trying to figure out what Powell said to make stocks rally so sharply,” said Steve Sosnick, chief strategist at Interactive Brokers. “Sure, he said no hikes are necessary and downplayed fears about stagflation, but that wasn’t worth a big speculative rally.” 

As for the longevity of the latest bond relief rally, Citadel’s de Pass cautioned that while the bounce “makes sense,” the market was nearing its limits.

“It has already run out of steam with the market well off the lows in yield,” he said. “The market probably struggles to run much more given we are in a place of data-dependency.”