Gary Cloud, a portfolio manager who oversees the fixed income portion of the Hennessey Equity and Income fund, said that "a holding pattern is going to be the short-term new normal" until the Fed announces an increase in rates. He expects to see a "range bound" U.S. Treasury debt market for the remainder of the year, even as volatility remains elevated.
To be sure, some fund managers interpreted the Fed's decision as a positive one.
"A few weeks ago the market was ready for it, and then the China volatility threw a wrench in that. They are trying to get the market back to pricing in an increase so that it's not a kick in the gut," said Steve Chiavarone, co-portfolio manager of the Federated Global Allocation fund.
The Fed's move to lower its long term projection for the fed funds rate to 3.5 percent from 3.75 percent could provide a boost to high-yielding dividend stocks that had traded lower prior to its announcement, said Chiavarone.
Thanks in part to a rally in dividend-paying stocks, he expects the S&P 500 index to end the year at 2,200 or about 200 points or 10 percent higher than its closing price Thursday.
Yet Lon Erickson, co-manager of several Thornburg income funds, said that he is growing concerned that inflation will increase more quickly than the market expects, leading to a "significant" sell-off in Treasurys.
Erickson has been eyeing adding Treasury Inflation Protected Securities, commonly known as TIPS, in order to be ahead of even a smaller than expected jump in inflation.
"If you keep rates low for long enough, there's enough money laying around that any increase in inflation is going to be interpreted as a fear that the Fed is truly getting left behind," he said.