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Market Outlook: Fed May Not Be Done Cutting Rates

Federal Reserve Board Chairman Ben Bernanke delivers the board's Monetary Policy Report to the Senate Banking Committee in Washington Wednesday, July 19, 2006. "The recent rise in inflation is of concern," and possible increases in the prices of oil as well as other raw materials "remain a risk to the inflation outlook," Bernanke said. (AP Photo/Dennis Cook)
Dennis Cook
Federal Reserve Board Chairman Ben Bernanke delivers the board's Monetary Policy Report to the Senate Banking Committee in Washington Wednesday, July 19, 2006. "The recent rise in inflation is of concern," and possible increases in the prices of oil as well as other raw materials "remain a risk to the inflation outlook," Bernanke said. (AP Photo/Dennis Cook)

Despite the Federal Reserve's surprisingly sharp cut in interest rates, some analysts think the central bank may not be done.

"This shows the Fed is sensitive to the credit markets and its potential impact on the economy," Steven Neimeth, portfolio manager for the SunAmerica Value Fund, told CNBC.com. "This suggests going forward that they would not hesitate to cut rates further if need be."

"I wouldn't say we're done," said Ken Volpert, portfolio manager with Vanguard Funds.

"I think the 50 basis points recognizes that we have a weakening economy and there's a lot of uncertainty associated with the credit tightening that seems to have happened," he added.

Most analysts on Wall Street were expecting a quarter-point cut in the federal funds rate, which banks charge each other for overnight loans, and up to a half-point cut in the discount rate, which is what the Fed charges banks for loans.

But the Fed surprised many with a half-point cut in both rates.

"God Bless the greatest central bank in the world," said Jon Evans, CEO of Atlantic Central Bankers Bank. "This is great news for the economy and the consumer."

What's Next

That doesn't mean the economy is out of the woods, however. Neimeth says the Fed will be paying close attention to the employment data for further signs of weakness in the jobs market. If that occurs, Neimeth believes the Fed would likely cut further.

Other experts agree that while Tuesday's cut was important, investors should be looking ahead to what happens in the economy and corporate earnings.

"We're going to be watching the performance in the markets, in particular mortgage-backed securities, asset-backed commercial paper and the financial stocks, very carefully," Hugh Johnson, chief investment officer at Johnson Illington Advisors, told CNBC.com. "We'll be watching for telltale signs that the crisis is passing and confidence is being restored."

"I think it's less important to look at today's announcement, but where the Fed is headed and where they're going for the rest of the year," said Andrew Schwarz, founder and manager of AGS Specialist.

Schwarz was encouraged by better-than-expected earnings from Lehman Brothers Holdings and he says analysts will be looking at performance from the big investment banks.

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"Lehman came out and for the first time, we had some clarity on what's really going on in the subprime problems," said Schwarz. "As that goes behind us and with the other big banks reporting this week, the crystal ball becomes clearer and, at that point, I think we're going to rally big."

Morgan Stanleyreports Wednesday, with Bear Stearnsand Goldman Sachsreporting on Thursday.

Stocks 'Still Inexpensive'

Even with the market's strong rally after the Fed announcement, Neimeth notes that the S&P 500 is still up only 6% year-to-date.

"If you are an investor who is underweight equities, now is probably a good time to get back involved," said Neimeth. "We've likely only seen half of the return that could come this year. The broader averages are only trading at 15 times next year's earnings, so equity markets are still inexpensive."

Johnson says he has maintained a full exposure to equities and he has no plans to change that now. "You are going to see small- and mid-cap stocks perform well," he said. "Also look for economically sensitive areas to be hot such as consumer cyclicals, industrials and technology."

Investors might also take heart in advice about the Fed from the Oracle of Omaha. Berkshire Hathaway CEO Warren Buffett told CNBC's Becky Quick that he doesn't think it makes any difference to stock investors what the Federal Reserve does.

"The important thing in stocks is to buy stock in a good business at a reasonable price," said Buffett. "Anybody buying or selling stocks based on what the Fed is doing or what they think they are going to do at their next meeting, I think, is destined to not have a great financial future."

Phyllis Burke Goffney is a news editor at CNBC.com. She can be reached at phyllis.goffney@nbcuni.com.