Contemplating the Fed's Encore

Now that the much-anticipated Fed meeting is out of the way, we can thankfully turn to other matters, such as: What does the central bank do next?

Yes, believe it or not, the path of future policy action was a hot topic in the immediate aftermath of the Federal Open Market Committee's decision Wednesday. Critically, there was some discussion that the quarter-point rate cut will be the Fed's last of this cycle, assuming no unforeseeable negative shocks emerge.

"Unless we slip over into net deflation, 'corrosive deflation,' I can't see them doing a whole lot more," said Jeffrey Saut, chief equity strategist at Raymond James. "They've destroyed the money market industry [and] killed the retirement community by forcing them up the risk curve."

Concern about disruptions to the money market industry -- where expense ratios often approach or exceed the now-1% fed funds rate -- was one reason commonly cited for the Fed's decision to opt against a 50-basis-point cut this week. Such considerations will remain prominent if and when the Fed next contemplates rate cuts, be it at the Aug. 12 FOMC meeting or some other juncture. So too will any political considerations about those Americans living on fixed incomes. (Not that politics plays a role in Fed policy, of course.)

Also, Saut noted the fed funds rate hasn't been below 1% since the Great Depression, suggesting "Sir Alan will not likely want to be remembered as the Fed head who lowered interest rates below those of the 1930s Depression era." (On a related note, there is a psychological risk of lowering the fed funds rate below 1%, lest more investors contemplate a zero-rate environment.)

More than historic comparisons, fixed-income participants focused on the policy statement accompanying Wednesday's rate cut. Specifically, the central bank's declaration that the balance of risk facing the economy is "roughly equal" between upside and downside.

In effect, the Fed "removed the bias toward easing that had been [previously] incorporated in its policy directive," said William Sullivan, senior economist at Morgan Stanley.