GDP Report Clips Doves

Inflation-wise, the numbers were benign. Core personal consumption expenditures came in at a 2.1% pace of growth for the fourth quarter, lower than the 2.2% third quarter reading. Likewise, the fourth-quarter employment cost index Wednesday morning showed a 0.8% increase, lower than the 1% analysts expected.

Nevertheless, investors are concerned about inflation from rising wages and above-trend economic growth. The risk premium on inflation-protected Treasury notes is creeping up, notes Randy Diamond, trader at Miller Tabak. Friday's payrolls report for January, which provides a read on average hourly earnings, will offer more insight into wage inflation.

As for what GDP means to the Fed, the markets still expect no change in rates Wednesday. But traders expect the policy statement will be more hawkish than those of recent meetings, mostly to acknowledge stronger fourth-quarter growth and signs of stabilization in the housing market.

Indeed, "if you take housing out of the equation, you have a booming economy, inflation running higher than the Fed's 'comfort zone,' a strong consumer, wages pushing higher and unemployment running at full employment," says Marc Pado, chief market analyst at Cantor Fitzgerald. "Under those circumstances, the Fed will be scratching their head to find a reason not to raise rates."

Darda notes that if you remove housing and autos, the economy grew at 6% pace in the fourth quarter.