GDP Report Clips Doves

Indeed, the Fed is still likely to reference worries about housing and possibly manufacturing to justify its pause, and the fourth-quarter GDP report and some regional manufacturing reports gives them ample evidence. Fears of what higher interest rates and adjustable-rate mortgage resets might do to the overall economy are still good enough reason for the Fed to tolerate a strong economy and slightly higher inflation.

"The Fed is on hold for the year," says James Bianco, president of Bianco Research.

But, "the Fed has to stay vigilant," says Darda, noting that the consumer has remained strong. "Their biggest fear was that housing would have a spillover effect to the consumer. Not only has that not happened, but the consumer is accelerating," he notes. "The idea that they would ease into this environment is ridiculous."

The minutes from the Dec. 12 Fed meeting acknowledged that "there were some indications that home sales might be starting to stabilize," and that "the adjustment of activity and prices in the housing market did not appear to have spilled over significantly to consumer spending." Also, the only thing Bernanke said about the economy when he testified before the Senate Budget Committee earlier this month was that manufacturing is not hollowing out, particularly given the most recent industrial production data.