Fed must decide how to play the recovery

Friday's jobs report puts the Federal Reserve into a tricky position. It wants to keep interest rates low because the economic recovery is still modest. But at some point, it will need to act to prevent inflation from becoming a problem.

You're going to hear a lot about this in the week ahead. The Fed's rate-making body, the Federal Open Market Committee, meets Tuesday and is likely to leave rates alone again. The inflation question, however, will surely be discussed before, during and after the meeting. The debate will become increasingly public in the months ahead.

That could be bad for investors in the long run because rising interest rates will pressure stocks, which haven't advanced much in March after a great January and good February.

The Dow Jones industrials ($INDU) are down 0.2% this month. Gains for JPMorgan Chase (JPM), Starbucks (SBUX), Lowe's (LOW) and PulteGroup (PHM) have been offset by declines in Caterpillar (CAT), Google (GOOG) and airlines. Apple (AAPL) has been flat.

Savers should be happier if rates rise; they'll get more on their certificates of deposit and money market funds. But patience is probably a smart tactic.

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What investors will hear from the Fed on Tuesday afternoon is something like this:

The central bank sees the economy growing moderately. Job creation is getting stronger. The economy has added 2.8 million jobs over the last 17 months. But the unemployment rate is still too high at 8.3%, and 5.4 million Americans haven't worked in six months or more.

There are big head winds looming, with Europe's fragile state a big issue. Oil prices are rising and may push gasoline prices higher, which could dampen consumer spirits and spending.

Though the Fed won't mention it, there are worries about how markets would react if the tensions over Iran turn into military action.

So, the one thing Fed Chairman Ben Bernanke doesn't want to do is tighten too quickly and stall the recovery.

Wall Street doesn't want that to happen, either. What Wall Street really wants is another round of quantitative easing that makes money exceedingly cheap and fuels stock and commodity speculation.

Arrayed against Bernanke are a number of FOMC members who are concerned that the Fed may miss the signal of an accelerating economy that brings with it new wage and other pressures. This past week, the Commerce Department said labor costs were up 2.8% in the fourth quarter. Yes, it was lower than the 3.9% rise in the third quarter, but it was much higher than the initial fourth-quarter estimate.

The Fed meeting and statement that comes out on Tuesday are probably the week's premier economic event. It will be parsed ad nauseam. But it will probably say or hint this: The central bank will keep rates ultra-low perhaps until 2014 because it wants to grow the economy. It will give itself room to act if inflation acts up.

Inflation will be a theme all week. You'll see people looking for it in the Commerce Department's Tuesday report on retail sales, which comes out before the Fed announcement.

It will turn up again on Thursday when the Labor Department reports on wholesale prices in the Producer Price Index.

It will finish the week on Friday in the Consumer Price Index report. This will get a lot of attention. You will be able to see the impact of higher gasoline prices. Between January 2011 and January 2012, gasoline prices jumped 9.7%. Fuel oil was up 12.1%.

The retail price of gasoline is up 14.7% this year, but most of that gain came in January and February. Watch, too, for other prices as well.

Also due next week:

Manufacturing reports Thursday from the New York and Philadelphia Federal Reserve Banks. Investors do watch these reports, especially the report from the Philly Fed.

Friday will bring reports on industrial production and capacity utilization. These will tell us how much slack is in the economy.

Markets for the week
			3/9/2012			3/2/2012			% chg.			YTD chg.
Dow Industrials			12,922.02			12,977.57			-0.43%			5.77%
S&P 500			1,370.87			1,369.63			0.09%			9.01%
Nasdaq			2,988.34			2,976.19			0.41%			14.71%
Russell 2000			817.00			802.42			1.82%			10.27%
Crude oil			$107.40			$106.70			0.66%			8.67%
(per barrel)
U.S. Dollar Index			80.08			79.46			0.78%			-0.54%
10-yr. Treasury			2.04%			1.99%			2.62%			8.93%
Gold			$1,711.50			1,709.80			0.10%			9.24%

Earnings: Clean Energy, Urban Outfitters, Ross Stores
The week ahead is not a huge week for earnings reports. Here's what to watch for.

Monday: Volkswagen (VLKAY) Clean Energy (CLNE) and apparel retailer Urban Outfitters (URBN). Clean Energy supplies natural gas to customers who want to power trucks and other commercial vehicles. It's growing rapidly, but it's not turning a profit. Urban Outfitters has struggled to generate revenue growth over the last few quarters. For Volkswagen, the question is how worried is the company about a recession this year in Europe.

Tuesday: Callon Petroleum (CPE) and clothing retailer Pacific Sunwear of California (PSUN). 

Wednesday: Ross Stores (ROST). Ross is the star of the day. It has capitalized on consumer worries about the economy. The shares hit a new all-time high of $56.22 on Friday.

Thursday: Cable-television broadcaster AMC Networks (AMCX) and Winnebago Industries (WGO). AMC is a strong player in cable TV with popular shows. The stock is near an all-time high. Winnebago is a bet on gasoline prices. If prices fall, the stock should rise.

Also next week are analyst meetings for Anadarko Petroleum (APC) and Chevron (CVX).