Nervous ‘Net Investors Await Fed Decision

They’ve experienced a couple of years of irrational exuberance and nearly one year of bubble-bursting.

Now it looks as though Internet stocks really may be facing their first genuine economic downturn.

Certainly the signs have been there: Even the healthiest dot.coms, companies with legitimate business models, have unleashed a barrage of revenue and earnings warnings in the past two months. But most have restricted their gloomy forecasts to the early part of the year, claiming that corporate crystal balls were just too foggy for a meaningful glimpse beyond Q2. Which is another way of saying that while they hope the dark cloud lifts soon, no one’s counting on it.

Not surprisingly, that cloud has settled suddenly and deeply into the psyches of U.S. consumers, and fears of a recession threaten to become a self-fulling prophesy.

On Tuesday, a closely watched survey showed that consumer confidence in the American economy had fallen more in January than in any single month since the 1990-1991 recession.

The sobering results of the consumer survey by the Conference Board, a New York-based business research group, could blunt the impact of the interest-rate reduction expected to be announced today by the Federal Reserve.

Indeed, given Fed Chairman Alan Greenspan’s prescient Senate testimony last week – in which he called consumer confidence “the critical issue” in determining whether the slowing economy tumbles into a recession – the troubling survey not only guarantees a rate cut, it could prompt the Fed to go beyond the expected half-point trim to slash rates by three-quarters of a point.

You have to go back to 1991 – the last recession – to find a larger single Fed-mandated drop in interest rates.

Which could put a whole new spin on market reaction to a deep rate cut on Wednesday. Rather than boost the spirits and confidence of investors, a reduction beyond a half-point could have a boomerang effect, signaling the government has sound reason to believe the downturn is worse than expected.

While a three-quarters’ rollback is unlikely, even the widely predicted half-point change – coming hot on the heels of the Fed’s unexpected half-point reduction on Jan. 3 – might have an unintended dampening effect on the market. And that will bring even more pressure to bear on Internet companies already struggling with slower sales growth, tight cash and withered market caps.

With such a combustible mix of conflicting economic factors, it’s almost impossible to predict reaction to whatever announcement the Fed makes on Wednesday. We’ll find out soon enough, though.

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