"As expected" from the Fed proved insufficient for financial markets Wednesday.

Already fading from earlier highs before the Federal Open Market Committee's announcement at 2:15 p.m. EDT, stocks and, especially, Treasuries swooned immediately in the wake of the central bank's decision to cut the fed funds rate by 25 basis points.

"Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing," the FOMC said in its policy statement. "The economy, nonetheless, has yet to exhibit sustainable growth. With inflationary expectations subdued, the Committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time."

The immediate reaction to the announcement suggested some traders were hoping for more aggressive action from the Fed. Notably, a slight majority of primary bond dealers were looking for a 50-basis-point cut and equity traders seemingly always want more from the Fed, regardless of its recently spotty track record.

After trading as high as 9161.74 midmorning, the Dow Jones Industrial Average fell sharply after the Fed's announcement, closing down 1.1% to 9011.53. Following similar patterns, the S&P 500 shed 0.8% to 975.31 vs. its early high of 991.64 while the Nasdaq Composite closed down 0.2% to 1602.63 after trading as high as 1630.

What was troubling from a technical perspective was that Wednesday was a reversal day, in which major averages established higher highs than the prior session but finished at lower lows. Still, trading volumes were subdued and the mood among many equity traders was the Fed announcement was a "nonevent."

Conversely, there was no denying the effect of the Fed's decision on the Treasury market. The price of the benchmark 10-year Treasury fell 1 9/32 to 101 28/32, its yield jumping to 3.40%. The price of the two-year note, which most closely tracks the fed funds rate, fell 11/32 to 99 30/32, its yield rising to 1.27%.

There was some discussion among fixed-income participants that Wednesday's rate cut will be the Fed's last of this cycle, assuming no unforeseen developments emerge.

"I can understand that point of view although I don't know if I share it," said William Sullivan, senior economist at Morgan Stanley. "The Fed's press release creates that impression."

Specifically, Sullivan referred to the Fed's balance of risk statement, which the central bank said was "roughly equal" between upside and downside risks. Although the central bank repeated its warning about the potential for "an unwelcome substantial fall in inflation" -- Fed-speak for deflation or, at least, disinflation -- the balance of risks statement effectively "removed the bias toward easing that had been previously incorporated in its policy directive," the economist said.

Despite the recent signs of firming mentioned by the Fed, Sullivan remains skeptical, citing Wednesday's weaker-than-expected durable goods data as evidence. Orders for big-ticket items fell 0.3% in May vs. expectations for a rise of 1%. In the day's other big release, new-home sales jumped 12.5% to a record-setting annualized rate of 1.157 million units. Existing-home sales rose 1.2% to a slightly better-than-expected 5.92 million units, annualized. (Still, the S&P Homebuilding Index fell 3.1%, continuing to follow trends in Treasury prices.)

But housing has been at or near record-setting levels for more than a year now and overall GDP is growing at only a 2.1% annual rate, Sullivan noted. "Housing can't do all the heavy lifting."

Until there is more sustained improvement in capital expenditures, order bookings, consumption and labor markets, "the Fed's assessment of economic revival will prove inaccurate," he said.

Heaven knows the Fed's been wrong before, but the Treasury market wasn't taking any chances on this day, speculating perhaps the Fed knows "something" about upcoming economic data, including tomorrow's jobless claims and/or next week's national manufacturing survey and employment report.

Even Sullivan, who is wary about the recovery's staying power, said the Fed's view must be given credence, for now.

Wednesday's selloff in Treasuries reflected rising expectations the Fed stands pat for the time being vs. prior expectations the central bank would either cut by 50 basis points today or by 25 today and another 25 in August. "Now, you must calibrate for a 1% fund rate through summertime, perhaps into fall," he said. "That's one reason the bond market is selling off."

Fed Interpretations, Equity Style

As mentioned above, the commonly held view among equity traders is that the Fed meeting was pretty much a snoozer, despite the afternoon fade. In fact, some traders were more focused on company-specific issues such as Goldman Sachs' ( GS) earnings, Bank of America's ( BAC) raised dividend, and Freddie Mac's ( FRE) conference call and earnings restatement, as well as Lehman Brothers' "uncommon values" list.

"If you think about it, the market 'worked' and Greenspan didn't create a huge surprise," said Brad Ruderman, managing partner at Ruderman Capital Partners, a Los Angeles-based hedge fund with approximately $150 million under management. "Volume was light and breadth was not horrid."

Advancing stocks led declining issues by 17 to 14 in NYSE trading, where 1.4 billion shares changed hands. Breadth was similar in over-the-counter activity, where 1.6 billion shares traded.

Today's Fed announcement "doesn't meaningfully change the trends of reflation, and the question of what is the proper level of discounting a better economy for the market," he said.

On a more guttural level, many equity traders seem convinced higher prices are in the offing near-term because of so-called window dressing by mutual funds. Fari Hamzei, president of Hamzei Analytics in Los Angeles, said it is a "no brainer" that shares will rally later this week and on Monday, as the quarter comes to a close and fund managers buy more of their favorite holdings.

Hamzei was long S&P and Nasdaq futures before flattening out prior to the Fed announcement. Although he erroneously speculated they might stand pat, the quant strategist said he was planning to get long in the aftermath of the announcement.

For myriad reasons, he probably didn't have to look hard to find willing sellers.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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