Greenspan's Unfinished Job

The Fed will likely soften its commitment to raise rates by signaling that additional rate hikes "may be needed," instead of saying they are "likely to be needed," as was said in previous statements, according to Hatzius. "The risk, though, is that the market will over-interpret the description as a hint that the Fed is just about done."

Such expectations might be contradicted as early as Wednesday, when markets will receive important updates on the manufacturing sector. The Institute for Supply Management's manufacturing index is expected to show a reading of 55.5 for January, down only slightly from December's 55.6. And on Friday, the all-important January employment numbers will be in, with the market expecting 250,000 new payrolls.

According to Goldman Sachs economists, warmer-than-expected weather brings upside risks to both of these numbers. They expect the ISM index at 57 and payroll growth of 300,000.

How much further the Fed moves above 4.75% is of course unknown, and will depend on the economy's performance in the months ahead.

But there are other convincing reasons to believe the Fed's work is not nearly finished. First, the central bank has merely returned interest rates to a "neutral level" after taking them to a 40-year low of 1% in 2003. It had ratcheted down rates to revive the economy from its post tech-bubble and post-September 11 slump.

According to Jim Paulsen, chief investment officer at Wells Capital Management, this helps explain why long-term rates have stayed low despite the Fed's tightening since last year. "It's been viewed [by the bond market] as removing that post-depression discount. The Fed is only now beginning to tighten," Paulsen says.

Because long-term Treasury rates have remained low, so have mortgage rates, and this continues to encourage purchasing of new homes, as was seen in last week's pick up in new-home sales. Rates on 30-year fixed-rate mortgages have been falling since reaching a high of 6.32% in December to around 6.12% last week.

Although the outlook for the housing market and home equities is undeniably softening, Paulsen will "remain bullish on the economy and the consumer until mortgage rates start rising for real."

His forecast for the Fed funds rate peak is at least at 6%.

Wall Street may eventually celebrate this as supporting the idea that the economy and earnings growth will remain sturdy this year, as is Paulsen's view. But adjusting to the idea of higher rates may prove painful in the interim.