Why the Markets Shrugged at Flagging Consumer Confidence

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Looks like bad news isn't what it used to be.

Confronted Tuesday morning by bummer earnings news from JDS Uniphase, AT&T and Compaq, and a plummeting consumer confidence report — 109.2 in April, well below the anticipated 113 — Wall Street shrugged.

By early afternoon, the Dow and NASDAQ were, if not exactly afire, nevertheless hovering above sea level on news that just a few weeks ago would have had them plumbing their depths all over again. What gives?

TIME senior economics reporter Bernie Baumohl says it's not so much that the recession isn't still coming — it very well could, with these indicators — but that the Fed is now coming too.

TIME.com: Tell us about the consumer confidence number.

Bernard Baumohl: It certainly reinforces the University of Michigan consumer sentiment numbers from last week. The major surveys are moving parallel to one another — and both are going down.

It shows a further erosion in confidence among consumers, who apparently see further deterioration in the economy and in business. Layoffs have picked up in pace, and fears are shifting from worrying about their neighbors' jobs to worrying about their own. Consumer spending is slacking because of this, and if that continues, the economy will unravel entirely.

So what silver lining did the markets see?

Well, this survey took place before the Fed's surprise move last week — and now that Greenspan has cut 2 full points from the short-term interest rate and demonstrated that he is indeed committed to avoiding a recession, the upshot of Tuesday's news is probably that the Fed will cut again by a half-point at the May 15 meeting, barring some unforeseen turnaround in the indicators.

If the same questions were asked today, I think we'd see a slight uptick in confidence. The stock market has been turning upward for a week now, and ultimately, investors and consumers alike know that interest-rate cuts are really the only medicine that gets the economy back on track. They see the Fed moving aggressively, and there's good reason to think we've hit bottom in the stock market.

So why would the Fed necessarily move again?

Confidence has dropped now in six of the last seven months, and that's still the biggest threat in terms of the economy slipping into a recession. Greenspan won't take any chances.