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SAN FRANCISCO -- Investors who continue to put their faith in

Alan Greenspan

got another jolt today. With the

Federal Reserve

failing to deliver the much-ballyhooed intermeeting rate cut, stocks tumbled again, led by tech shares.

While the

Dow Jones Industrial Average

suffered a very modest decline, the

Nasdaq Composite Index

tumbled 4.4% to 2207.82, its lowest close since Dec. 31, 1998. The

S&P 500

fell 0.8%.

Ironically, those betting on Fed rate cuts prior to March 20 should have rejoiced, as another batch of weak economic data came out of the oven today, piping hot and fresh. Durable goods orders fell 6% in January, twice the decline expected by economists and further evidence of the slumping manufacturing sector. Elsewhere, new-homes sales fell 11% in January. Both figures are from the

Census Bureau


But what really should have gotten the "

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Fed-cut-now" crowd excited was the latest decline in

consumer confidence

, which fell to 106.8 in February vs. 115.7 in January, according to the

Conference Board

. That's the fifth consecutive monthly decline and the drop was worse than the consensus estimate, which called for confidence to fall to 110.5.

Perhaps excitement over the monetary policy implications of the flagging confidence figures explains why the Dow and S&P were relatively unscathed amid this latest tech debacle. But (please) don't let the talking heads tell you the Comp fell because of the declining confidence. Adding to ongoing concerns about earnings visibility and bulging inventories, techs got hit today by a

Goldman Sachs

downgrade of nearly the entire information technology hierarchy; the

Nasdaq 100

fell 6.4%.

Meanwhile, largely missing from the debate about consumer confidence is that some economists believe the steeper decline in recent months in consumers' outlook for the future vs. the current situation is further proof the

recession obsession is overdone.

In the latest report, expectations fell to 68.7 from 79.3, while confidence about the present situation fell to 164.1 from 170.4. That breaks the recent streak in which expectations have fallen much more sharply. Since September, the expectations component has fallen 40% while the present situation index is off 10.3%. Overall consumer confidence has fallen 25% since September.

"This is a key issue," said Diane Swonk, deputy chief economist at

Bank One Corp.

in Chicago. "The bottom line is actions speak louder than words and consumers spend even though they say they're nervous." (Fed Vice President Roger Ferguson addressed this issue in a

speech Tuesday.)

Swonk pointed to the recent improvement in retail sales and noted that the decline in new-home sales reported today followed a steep upward revision in December. "It's hard to find a collapsing consumer," she said.

The economist also noted that while overall durable goods orders fell, nondefense capital goods orders, excluding aircraft, rose 6.5% in January. Additionally, orders for industrial machinery and equipment rose 5.7%.

That said, the Fed has said it will continue to ease until the recession risks abate "and they haven't abated," Swonk added.

The ongoing debate over when the Fed moves is a "sucker's game," Swonk said, suggesting what's most important is the message the central bank is trying to send. From her vantage point, the Fed is trying to hedge against a steeper decline in economic activity and is "willing to risk overstimulating at this stage to make sure the economy doesn't go into recession."

This gets to the notion that "a little inflation is a good thing," especially compared with the alternative of a steep recession. That's an argument I've heard from many readers and which I'll discuss in a forthcoming column.

If This, Then That

A year from now there could be a "real inflation problem" when the "full brunt" of rate cuts to date collides with a tax cut hitting an economy "that has already reaccelerated," Swonk continued.

As one of the few economists currently expressing concern about inflation's potential re-emergence, she conceded that a year from now is "too far out for most of Wall Street" (unless of course, you're talking about bullish equity analysts looking for an earnings rebound). But "there is a lot of money to be made if you're willing to bet on interest rates rising," Swonk said (and as I write this she's saying the same on


-- drat). Currently, she's forecasting fed funds could be as low as 4.50% by summertime but will be back to 4.75% -- and heading higher -- come year-end.

Such an outlook jibes with rising sentiment on Wall Street that Treasury bonds have already priced in additional rate cuts and thus have little upside at current levels.

That view is shared by Stanley Nabi, managing director at

Credit Suisse Asset Management

, which has about $107 billion under management.

"At some point in the next 30-to-60 days the bond market will be fully valued" and investors should reduce their exposure, he said.

I'd called Nabi, a true Wall Street veteran, to get his views on where investors should put their money if inflation is making a comeback.

"Inflation will rise for the next two-to-three months," Nabi said, noting higher energy prices still have to work their way through the pipeline and that commodity producers such as

U.S. Steel

are attempting to implement price hikes.

But the money manager does not believe inflation will be long-lasting or terribly problematic, predicting the

Consumer Price Index

will be growing around 3% at year-end, or just above its historic trend at 2.8%.

Nabi remains bullish on energy stocks -- a group he has

long favored. Current recommendations include

Philips Petroleum



Transocean Sedco Forex



Anadarko Petroleum


, and -- for more conservative investors --

Exxon Mobil



He also recommends food packagers




General Mills


, as well as financial plays such as

St. Paul Companies



Hartford Financial






Morgan Stanley Dean Witter



Credit Suisse Asset Management is long each of the aforementioned, save Morgan Stanley, which Nabi said he's waiting to buy at lower prices. "There's bad news coming the way the stock acts," he said. "When it comes out, assess and buy on the news."

Morgan Stanley Dean Witter rose 0.7% today but is down 12.1% in 2001 and 19.2% since its recent peak on Feb. 2.

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

Aaron L. Task.