Interest rates are so 2018. When it comes to Federal Reserve policy next year, markets are signaling that the focus will be on any potential tweaks to the pace of running down the central bank’s bond portfolio.

Fed officials on Wednesday predicted just two rate hikes next year, down from three in September, and well under the four previously seen by Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG. They also cut their long-run expectations for the policy rate. None of that pleased stock investors, with the S&P 500 Index sliding Wednesday, mostly after Chairman Jerome Powell said the Fed’s quantitative tightening will continue apace.

Fed policy makers have long considered the reversal of quantitative easing as a mechanical process, not an active policy instrument. Governor Lael Brainard in 2017 said the case for subordinating the balance sheet to interest-rate policy was “straightforward and compelling,” while stopping short of ruling out its use as a tool. Then-Chair Janet Yellen said 18 months ago that the unwind would be like “watching paint dry.”

But when Powell on Wednesday said at a press conference that the process is indeed progressing smoothly, on “autopilot,” investor disappointment was clear. The S&P 500 slumped 1.5 percent by the close, some 14 percent down from the record hit in September. Ten-year Treasury yields slumped to 2.75 percent, the lowest level since April.

Slow Down

“A more nuanced answer on the balance sheet might have mitigated market dynamics today,” Krishna Guha, head of central bank strategy at Evercore ISI in Washington, wrote in a note to clients. There is a “a clear disconnect between equity investors’ renewed hypersensitivity with regard to the balance sheet” and the Fed’s read on its impact on financial conditions, he wrote.

For his part, Scott Minerd, chief investment officer at Guggenheim Partners, concluded that the “market is disappointed” that the pace of balance sheet reduction is not an option under consideration at this point. The slide in stocks, and slump in bond yields “showed the market may be signaling a desire to slow down the pace of balance sheet normalization,” he wrote in a tweet.

Interest-rate futures suggest that traders aren’t now even fully pricing in a single rate hike for 2019. If that continues to be the case, and financial markets remain turbulent, Powell and his colleagues would get little bang for their buck by simply taking another hike out of the dot-plot forecast for the policy rate, or otherwise talking down prospects of further tightening.

What might at some point prove more effective is consideration of adjusting the current pace of running off as much as $50 billion of the Fed’s bond portfolio each month.

“The balance-sheet discussion will take on additional prominence into 2019,” wrote Guha, who previously worked at the New York Fed. “With barely half a hike priced in for 2019 there is no longer a sizeable buffer in terms of expected Fed rate hikes that could be taken out if the outlook were to darken materially from here.”

For now, the Fed is exacting “tough love” on the markets, Morgan Stanley strategists including Matthew Hornbach wrote in a note. They suggested betting on 10-year Treasuries and 30-year bonds outperforming two-year notes.