The Federal Reserve embarked on a massive repositioning in global financial markets as investors reacted to a world where the Federal Reserve no longer guarantees that its policies will be restrained – or simple -.

The dollar gained the fastest in a year against a basket of currencies in two days.

Stocks were mixed globally on Thursday, as were bond markets. Many raw materials were sold out. The Nasdaq Composite was higher while the S&P 500 and Dow Jones Industrial Average fell. Tech gained and cyclical stocks fell.

The central bank delivered a strong message on Wednesday when Fed chairman Jerome Powell said officials had talked about curbing bond purchases and would at some point decide to begin the process of slowing purchases. At the same time, Fed officials added two rate hikes to their forecast for 2023 where there were previously none.

“It is the end of the utmost reluctance,” said Peter Boockvar, chief investment officer of Bleakley Global Advisors. “It’s not getting hawkish. It’s just that we’ve passed the peak of reluctance. This market reaction is like they’re already tapering off.”

Strategists say the Fed’s slight move toward policy tightening didn’t shock markets on Wednesday, but is likely to make them volatile in the future. The Fed essentially recognizes that the door is now open to future rate hikes.

It is expected to issue a more in-depth statement on the bond program later this year and then, within a few months, begin the slow process of bringing its $ 120 billion per month purchases to zero.

The yields on Treasuries with a shorter duration, such as the 2-year note, rose. Longer duration returns, such as the 10-year benchmark, fell. This so-called “flattening” is a trade when interest rates rise. The logic is that longer-term yields will fall as the economy may not do as well in the future with higher rates, and short-end yields rise to reflect expectations for the Fed rate hike.

US Treasuries with longer maturities, such as the 10-year, have been lower lately than many strategists had recently expected. That’s partly because they are very attractive to overseas buyers because of negative interest rates elsewhere in the world and the liquidity in US markets. The 10-year yield shot to 1.59% on the Fed news but was back down to 1.5% on Thursday afternoon. The returns move against the price.

Commodity-related stocks, such as energy and commodity stocks, fell sharply on Thursday afternoon. Energy was the worst performing sector in the S&P 500, down 3.5%. Materials lost 2.2%.

“It’s a massive flattening of the yield curve. It’s an interest-rate business and it’s the belief that the Fed will slow growth,” Boockvar said. “So you sell commodities, you sell cyclicals … and in a slow-growing economy, people want to buy growth. It all happens in two days. It’s just a lot of returns.”

Boockvar said the curve flattening was also quick. For example, the spread between 5-year and 30-year bond yields narrowed quickly and rose from 140 basis points to 118 basis points within two days.

“You are seeing an incredible breakdown in positioning in the bond market. I don’t think people thought the Fed would, ”said Rick Rieder, BlackRock’s CIO of Global Fixed Income.

“We thought the flattening trade was the right move when we saw some of the news from the Fed. That was something we jumped on pretty quickly. I have to say we’re letting some Treasuries go into this rally,” said Rieder opposite CNBC.

For equity investors, the shift in cyclical stocks stands in the way of a trade that was popular when the economy reopened. Financial stocks fell on the flatter yield curve, while REITs fell slightly higher. Technology stocks rose 1.2% and healthcare rose 0.8%.

“The result is higher volatility in the equity markets, which I think we have and will continue to have,” said Julian Emanuel, Head of Equity and Derivatives Strategy at BTIG. “Things changed yesterday. This whole idea of ​​data dependency – the market is going to trade it like crazy, especially given the fact that public participation remains very high and the stocks that the public is most interested in, high multiple-growth stocks, have led the way in the past Weeks as the bond market stayed in a range. “

Although Powell conceded that inflation was higher than the Fed expected, the central bank also sent its message that inflationary pressures may be temporary. The Fed raised its core inflation forecast for this year to 3%, but in its latest forecast for next year it was only 2.1%. Powell used the example of the rise and fall in wood prices to illustrate his view that inflation will not last.

However, Emanuel said it was difficult to tell if inflation is volatile and that clearing the pandemic has been difficult to predict. “Whether it’s the Fed or paid economists on the sell side or paid economists on the buy side, the ability to measure what’s going on in the economy really is nothing but … everywhere,” Emanuel said, adding that the inflation data were all hotter than expected.

He believes the market will be trading in a range for now, with the S&P 500 bottoming out at 4,050 and peaking at 4,250. The S&P 500 closed at 4,221 on Thursday, down just 1 point. The Dow was down 0.6% at 33,823 and the Nasdaq was up 0.9% to 14,161.

The focus now is on the Fed meeting at the end of July. This could add to volatility as investors wait to see if the Fed will reveal more details on tapering after this meeting. Many economists expect the Fed to use its annual Jackson Hole Symposium in late August as a forum to set out its plan for the bond program.

The bond purchases, or quantitative easing, were introduced last year to provide liquidity to the markets during the economic downturn that began last year. The Fed buys $ 80 billion worth of US Treasuries and $ 40 billion worth of mortgage paper every month. Rieder believes the Fed could curb purchases by $ 20 billion a month once it starts tapering. Then, once the Fed hits zero, it could consider when to raise rates.

Market expectations for rate hikes have improved, and the euro-dollar futures market sees four rate hikes by the end of 2023, according to Marc Chandler of Bannockburn Global Forex. Prior to the Fed’s announcement on Wednesday, futures showed expectations for about 2.5 rate hikes.

Strategists believe that part of the Fed’s response is temporary, reflecting investors who have been too marginalized on some positions. “I’m still a commodity cop,” said Boockvar. Commodities had already started falling before the Fed’s announcement after China announced plans to release metal reserves.

“The Fed had to master the inflation story. They did very, very little, but at least they did it, and they pushed inflation expectations and they saw a pullback,” he said. “The question is, can they hold out. Raising interest rates in two years or bringing them down at baby crotch won’t do it, but for at least two days they managed to calm things down.”