What just happened? 

The Fed did some justice to the notion that they would talk tougher about an October or December rate hike if they didn't hike yesterday.  There are precious few anecdotes to support that stance though.  Far more defensible is the reality that no one (not that I read or heard, anyway) saw coming.  This is the reality where, not only did the Fed NOT hike yesterday, but they were actually far more dovish in discussing the near-term future.

About the only "tough talk" we have for the near term future is Yellen's mention of October as a rate-hike possibility.  That's not normally something we would believe (because we agree the Fed isn't going to hike if they don't have a press conference to help balance the pain).  But in this case, Janet saw our skepticism and found away around it by saying if they hiked in October, it would be accompanied by an unscheduled press conference.

The problem is that--before yesterday--we thought we were dealing with a Fed that was hell-bent on hiking and simply looking for an excuse (or lack of objection, as the case may be).  Certainly, if that was the case, it made all kinds of sense to hike yesterday.  Instead, we see a Fed that is participating in reality to a far more logical extent.  News Flash: they actually DO care about inflation, and they're actually NOT sure how quickly it will be coming back.  Heck, I'd bet a few of them wonder if inflation as we once knew it is coming back at all.

We were thrown the additional curve ball of the Fed's global macroeconomic concerns.  Their mandates have been "employment and price stability."  As I and many others pointed out yesterday, they've now added global growth concerns and market stability to that list.  Oh boy...  If the Fed is going to wait for the global growth picture to improve, they might be waiting longer than they thought. 

At the end of the day, the default assumption about an absence of a rate hike is that it's more inflationary than not, and inflation is bad for rates.  It's also better for stocks.  It's also potentially better for the economy.  None of that stuff is usually good for rates.  Rates fell yesterday, partly to unwind the panicked flight-to-cash from Tuesday and partly in response to the longer term inflation/growth implications in Announcement/Press Conference.  

Short term rates fell significantly more--putting in their best day since 2009.  Here's a chart of 2yr yields as an example.  Just for the sake of perspective, I threw in a longer term version just below it.  The point is to reinforce just how abnormally repressed the rate environment has been for the past 5-6 years and how yesterday's big swing would be just enough medium big day before that.  Times, they have a'changed.  After yesterday, we might start wondering if they'll ever a'change back, or how long that will take.