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The Fed to steer next week's market direction

Markets are already primed for the possibility the Fed will signal it's a step closer to normalizing its current super low rate policy, and even so, trading could be volatile around whatever it does.

But the Fed is not the only danger zone for markets—there is also the Scottish referendum on independence Thursday, expected to fail but still be relatively close in polls. Traders are also watching for any pickup in tensions between Russia and Ukraine after a new round of sanctions on Russia from Europe and the U.S.

Against this backdrop, Wall Street will be celebrating its biggest IPO everthe estimated $21 billion offering from Chinese Internet retailer Alibaba, which prices Thursday and already has drawn strong demand.

Traders work on the floor of the New York Stock Exchange in New York.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange in New York.

"Alibaba is exciting. They're going to close the books early. The deal was oversubscribed. It's not going to have any problems. It's how it trades afterwards," said Art Hogan, chief market strategist at Wunderlich Securities. "It's a more mature company. It's not like it's coming out in its first or second inning of growth … For the broader market, it will put behind us and end the debate that investors had to sell something else to buy Alibaba."

U.S. economic data includes producer and consumer inflation readings Tuesday and Wednesday, but the big event for markets will be the Fed's statement at 2 p.m. EST Wednesday and the follow-up press briefing by Fed Chair Janet Yellen.

Read MoreWall Street changing rates view

Traders are also fixated on the markets themselves, which have been moving in part on the idea of a comparatively stronger U.S. economy and a central bank ready to start the slow walk away from its zero rate policy. The dollar index was trading near a 14-month high Friday, up for a ninth week. Treasury yields rose in the past week, with the 10-year yield at 2.60 percent Friday.

The stronger dollar has been putting a dent in commodities price, a trend stock traders are watching as sinking energy prices sting energy stocks and other commodities-related shares weaken. Mining and materials shares were down 2.3 percent in the past week and energy equipment companies were down 3.4 percent.

Stocks fell for the first time in six weeks. The S&P 500 was down 1.1 percent, and the Dow was off 0.9 percent at 16,937 and the Nasdaq was down 0.3 percent.

Read MoreThis could be the trade of the decade

Increasingly, Wall Street economists are anticipating the Fed will respond to an improving economy as its bond buying program winds down. It is expected by some economists to be prepared to remove some dovish language in its statement that was used to assure markets it would keep rates low for a long time.

Now some economists expect the Fed to drop the comment that it will keep rates low for "considerable time" and emphasize that data is key to its decision. But the street is no way in agreement on a Fed move, so there could be volatility no matter what it does. The market has also been shifting its expectations for a first rate hike to the middle of the year from the third quarter.

Read MoreFed taps Fischer to lead new stability committee

Scott Wren, senior equity strategist at Wells Fargo Advisors, said he does not expect the Fed to tweak the language. Wren expects the market to rally if the Fed sounds dovish, and does not make a change in language.

The Fed is expected to continue tapering down its bond buying program until it ends in November. "I don't think they're going to do something with rates until the second half of next year. I think the Fed is going to give us some pretty clear good guidance three or four months ahead of that. I don't think they're going to do it. It's too far in advance, and there's too much that can happen," he said.

If the Fed is hawkish, he said it could trigger more selling and that would generate a buying opportunity. He expects the market would still trade higher from current levels into the end of the year.

Bof A Merrill Lynch strategists described the week ahead with Alibaba and the FOMC both prominent, as a collision of the three big investment themes of the past decade - liquidity, China and the internet.

"But if the September clash of 'exuberance' and policy 'fear' fails to produce a much anticipated jump in volatility, we look for capitulation by cashed-up, hedged investors into risk assets," they wrote, noting they expect the market to overshoot. The Merrill analysts say they remain long stocks but still believe a correction is in the cards.

Whether the Fed unsettles markets or not Wednesday, traders will be watching the vote in Scotland Thursday and Friday.

Scottish financial institutions have warned they would move to London if the vote to separate from the United Kingdom succeeds.

"The market will go back to business as usual if we get a no vote," said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank. "If you had a yes vote, the dollar would strengthen against sterling."

Monday

Earnings: Analogic

8:30 a.m.: Empire state survey

9:15 a.m.: Industrial production

Tuesday

Earnings: FactSet, Adobe Systems, Apogee

FOMC meeting begins

8:30 a.m.: PPI

9:00 a.m.: TIC data

Wednesday

Earnings: FedEx, General Mills, Lennar, Cracker Barrel, Clarcor, Herman Miller

8:30 a.m.: CPI

8:30 a.m.: Current account

10:00 a.m.: NAHB survey

2:00 p.m.: FOMC statement

2:30 p.m.: Fed Chair Janet Yellen briefing

Thursday

Scotland independence vote

Earnings: Oracle, Rite-Aid, IHS, Tibco, RedHat

Alibaba IPO pricing

8:30 a.m.: Initial claims

8:30 a.m.: Housing starts

10:00 a.m.: Philadelphia Fed survey

Friday

10:00 a.m.: Leading indicators

—By CNBC's Patti Domm