Breakout, or Fake-out?

So congratulations, trivia buffs: The Dow ended last week at its highest level since June 12, 2001. It's a breakout, unless it's a fake-out. We should know shortly after the Federal Reserve meeting on March 22, which could reset interest-rate expectations for the rest of the year.

The Fed has nurtured financial markets for nine months with a promise to keep the pace of rate hikes "measured," along with an insistence that the gradually rising rates remain "accommodative" in absolute terms.

But that language seems increasingly at odds with brisk economic growth, inflationary pressures and a flattening yield curve. In recent weeks, Fed Chairman Alan Greenspan and some of his colleagues have hinted that they're looking for new words to live by.

No doubt they'll find a satisfactory straddle. But in the meantime, Wall Street will just have to hope that the Fed gets the interest-rate policy and interest-rate talk exactly right. Too many hikes could throttle growth and make stocks look expensive. Too few risk higher inflation and a renewed dollar dive.

The stakes get higher toward the end of a credit tightening cycle, where every incremental rate hike starts to pinch, and could mean the difference between a soft landing (February 1995) and a recession (May 2000). That first hike last June boosted the federal funds rate by 25%, but didn't raise anyone's borrowing costs, save for the lucky few who get to borrow from the Fed. The hike widely expected this June would be much smaller relative to the current rate, and much bigger in terms of its potential economic fallout.

Meanwhile, earnings-warnings season is here, and since the market isn't expecting any major blowups, there had better not be any. Add in the fact that stocks are closer to overbought than oversold at this point, and you can see why share buyers might want to take a break.

But every day the major averages hold these pre-Enron, pre-9/11 levels, their claim on them grows stronger. And all the while the meter will be running, measuring the still bountiful profit inflows into the corporate till.