The stock market had a tepid reaction last week to lower interest rates, lower oil prices and a stronger dollar. Major averages took off Monday as those trends reversed, further aided by some merger-inspired gains in tech shares.



acceptance of


(ORCL) - Get Report

long-running buyout offer and a slightly better-than-expected retail sales report helped the market start off strong. Buying accelerated in the afternoon as two of the three major indexes bested last week's high-water marks.


Dow Jones Industrial Average

, for example, crossed Friday's intraday high of 10,616 and rallied to close up 0.9% to 10,638.32. The

S&P 500

exceeded last week's high of 1192 to finish at 1198.68, a gain of 0.9%. The

Nasdaq Composite

didn't beat last week's high above 2160 but gained 1% to 2148.50.


(HON) - Get Report

was the top gainer among Dow components, rising 3.2% thanks to an improving outlook. PeopleSoft gained 10% and Oracle rose nearly as much while other software makers gained in concert, including


(SAP) - Get Report

, up 3%, and


( LWSN), which added 4%.

Here Comes the Fed

Monday's rally came ahead of Tuesday's meeting of the

Federal Reserve's

Open Market Committee, which is widely expected to raise its benchmark rate by another 0.25 percentage points to 2.25%.

With traders and economists nearly unanimous in expecting another rate hike, the accompanying statement from the FOMC will take on greater significance. Notably, there has been some speculation that the Fed may upgrade its assessment of the economy's strength and inflationary pressures. Such a change would imply that the central bank was likely to raise rates more vigorously than currently expected, potentially sending bond prices and financial stocks downward.

The controversy started back on Dec. 2 when

The Wall Street Journal

reported that unnamed Fed officials were growing worried that a surge of inflation might be percolating beneath the seemingly stable surface.

As evidence that the Fed might become more vigilant on inflation, analysts point to the central bank's monthly business climate survey. The Beige Book for October reported businesses were expressing increasing concerns about rising costs of energy and materials while retail prices increases were subdued. The December survey found further evidence as increased cost pressures were reported across the country and "some industries were successful in passing along cost increases."

Meanwhile, the October Consumer Price Index gained 0.6%, the most in five months, and Friday's Producer Price Index report showed a 0.5% rise, ahead of forecasts, mostly due to higher energy prices. Prices of finished goods rose 5% over the prior 12 months, prices of intermediate materials rose almost 10% and crude materials jumped 26%. Friday, after the Fed meeting, the November CPI arrives.

The dollar's fall, which resumed Monday after a three-day minirally, is also a potential spark of inflation as it makes imports more costly and reduces cost competition on domestically produced goods.

Moreover, the FOMC's Nov. 10 statement said inflation and longer-term inflation expectations remained "well contained" a step up in concern from the September statement's assessment that "inflation and inflation expectations have eased in recent months."

Still, the odds favor no significant change to the Fed's inflation assessment, according to senior economist Haseeb Ahmed of After all, oil prices have plummeted in recent weeks, although crude futures rose 0.4% to $41.19 per barrel Monday. Furthermore, a change in wording implying more rate hikes isn't consistent with recent speeches by Fed officials sticking to the "measured pace" rhetoric, he said. A shift is "very unlikely," he concluded Monday in a commentary on the Fed meeting.

So, the likely path remains the same -- slowly higher rates. Along with a variety of data showing continued economic strength and improving consumer confidence, the inflation data will keep the Fed on its path of measured tightening for some time to come, November's weak payrolls report notwithstanding.

Policy & Telecom

There's another important decision coming down this week for at least one huge segment of the economy. The Federal Communications Commission, for seemingly the billionth time, will revise its ground rules for competition under the Telecommunications Act of 1996. These rules have been to court more times than Johnnie Cochran and still the FCC hasn't been able to please all the various constituencies -- the "Baby Bells," big long-distance companies, upstart carriers and state regulators -- in a way that is acceptable to the courts.

On Wednesday, the agency comes out with its latest try and already the spin is coming fast and furious on all sides. Just remember that it's in the interests of the FCC to make the decision at least appear fair and balanced. Beneath the surface, the Bells are slowly piling up the victories as regulators make it harder for competitors to lease access to parts of the phone network at cheap rates. The market recognized that and


( SBC),


(VZ) - Get Report



( BLS) have gained in recent days. On Monday, Verizon gained 1%, SBC added 2% and BellSouth rose 2%. Any selloff after the order would likely be a buying opportunity.

Blair Levin, who was chief of staff to FCC Chairman Reed Hundt, recently observed that both the FCC and the Bells have reasons to claim that competitors are the winners. The Bells want Congress to rewrite the telecom act next year and the FCC wants to avoid charges it is killing competition.

"While the Bells will likely not win everything they wanted, they appear on the verge of taking further steps which -- in conjunction with likely court challenges, administrative proceedings and business realities -- will create further difficulties for those business models which rely on government-imposed unbundling to thrive," wrote Levin, now an analyst for Legg Mason in Washington.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.