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Warning nips investor enthusiasm
Fed's inflation worries fuel fall in Internet stocks

NEW YORK -- If the Federal Reserve wants investors to start thinking a little harder about the risks they take, it is getting some results.

Since the Fed's statement on May 18 that it was considering a tighter credit policy, the markets have given telltale signs that the people who buy and sell stocks and bonds feel more cautious.The most obvious evidence has been a 30 percent drop in prices of Internet stocks, the speculative stars of the late 1990s, from their April high. Analysts say the same story is being told elsewhere -- for instance, in the bond market, where the spread in yields has widened between ultrasafe Treasury securities and riskier high-yield and international bonds.

"Investor enthusiasm has ebbed for a while," says Byron Wien, investment strategist at Morgan Stanley Dean Witter & Co.

Or in the words of Jim Griffin at Aeltus Investment Management in Hartford, Conn., "The new monetary bias makes the risk assessment of investment options seem more important than the calculation of potential reward. Fear is making inroads on greed."

The ostensible cause for the Fed's change of attitude was concern that inflation might be reviving in the producing and consuming economy, as evidenced by a 0.7 percent jump in the consumer price index for April.

Beyond that, though, Alan Greenspan, the central bank's chairman, has long made it plain that he keeps a close watch on inflation in securities prices as well. Some 2 1/2 years ago, he issued his famous warning about "irrational exuberance" on Wall Street.

The new notes of caution come just as confidence has been increasing about the chances for worldwide recovery from the Asian financial crisis of the past two years. That helps explain a recent pickup in the pace of business in the United States.

To some observers, a little worry about credit-tightening is a happy alternative to the deflation scare that swept through the markets last summer and fall.

"Essentially, what the market continues to do is unwind the real economic fear of last year, which motivated investors to own the safest vehicles in each asset class," says Greg Smith, chief investment strategist at Prudential Securities.

"For bonds, the safest vehicle was U.S. Treasuries, while in stocks investors deemed the large-cap growth stocks the safest. The world now is economically safer."