It's all about the Fed, but watch for these flareups

The Federal Reserve in the coming week may finally signal it is on a course to raise interest rates for the first time in nine years.

Anticipation of a change in its more than 6 year old zero-rate policy has been sending ripples through financial markets, lifting the dollar and driving commodity prices lower. Stocks have swung wildly, with the Dow making four triple-digit moves in both directions in the past week.

The Fed meets Tuesday and Wednesday and is expected to remove the word "patient" from its statement, putting markets on notice that it is getting ready to consider a rate hike as early as June. Markets have shifted ahead of the central bank—with a strengthening dollar increasingly viewed as a negative factor for the stock market.

Janet Yellen
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Janet Yellen

Andrew Burkly, head of institutional portfolio strategy at Oppenheimer Asset Management, said stocks could continue to see selling pressure into the Fed meeting. "I think maybe there's a continuation of this," he said of Friday's downdraft. The S&P 500 was down 0.9 percent for the week to 2,053, and the Dow was off 0.6 percent at 17,749.

Burkly said oil prices could also be a key to the coming week. "Oil is going back to test its low," he said. "We're either going to hold it or break it next week ... if it breaks to a new low, you have to take it as a negative for the (stock) market."

He said investors would then reassess the impact on earnings of oil and energy companies, and those names could see selling pressure. West Texas Intermediate futures for April fell more than 9 percent to settle at $44.84 per barrel, just 39 cents above January's closing low.

Read MoreOil plunges on bloated US supply

Some analysts are targeting an area around $40 as a floor for WTI, but others say if the oversupply issues continue to grow, the bottom could be much lower.

The dollar move and oil's decline have created a level of anxiety in markets for what they could potentially mean for the Fed. Under the central bank's dual mandate, it is expected to seek full employment and stable prices, but inflation has been stubbornly low. More disappointing data on the inflation front came in the producer price index Friday, which surprisingly declined in February.

"(Fed Chair Janet) Yellen has gone to great lengths to say they don't need to see inflation at 2 percent, but they do need to see a firming in core inflation," said Diane Swonk, chief economist at Mesirow Financial. "They have to be sure when they raise rates, they don't have to go back again. They are going to move very glacially."

At the same time, job growth has been strong, with February's 295,000 nonfarm payrolls reaffirming a trend of strong hiring.

"They shifted from worrying about just the labor markets to inflation," Swonk said.

Read MoreThis Fed economic indicator looks pretty awful

Markets, in the meantime, have had outsized responses to economic data, reacting to how the Fed might view it. After the February jobs report, the stock market sold off on concerns the central bank would move quicker to raise rates, but the decline in February retail sales Thursday soothed markets, and helped spark a rally on the view the sluggish economy will force the Fed to move slowly.

Swonk said the Fed will certainly consider the rising dollar. "This is another deflationary effect. At the end of the day, they've got to step back and say, it's not helping them get where they want to go. They could acknowledge there are foreign risks, as they already did," she said.

Swonk expects the central bank to move slowly and carefully to "normalize" rates. "At the end of the day, it's a lot of discretion because it's unchartered waters we're in. We're talking about normalizing policy with a $4.5 trillion balance sheet and a global economy that's still too cold," she said.

One of the factors ruffling markets is that the Fed is alone as it heads into a tightening regime, while other central banks—like the European Central Bank—are moving to ease. The ECB's bond-buying program has sent European sovereign rates sharply lower, and the euro to a 12-year low.

Read MoreGlobal markdown: Why money is on sale

As for the Treasury market, rates moved lower in the past week, tugged in part by the decline in Europe. "We're narrowing in on a Fed hike, or at least the paving of the way to a Fed hike. That's a good dollar story, and a curve-flattening story," said David Ader, chief Treasury strategist at CRT Capital. Analysts expect the yield curve to flatten, with short-end rates rising more due to their sensitivity to rising rates.

"Between now and then, without a lot of critical information, we're trading the removal of the 'patient' language which means maybe they can go as early as June, and for the moment, the market is OK with it," Ader said. The 10-year was yielding 2.11 late Friday, and he expects it to trade in that area and to 1.95 on the low side.

While markets have been gyrating ahead of the Fed meeting, a number of stock analysts expect the market to see just a shallow selloff.

Read MoreShort, sharp shocks: Why markets should brace for more

"I think the overall decline will be relatively modest still," said Burkly. "You want to buy dips as we get closer to 2,000 on the S&P. That would be a 5 percent decline, not much in the bigger scheme of things. I think it would "

Burkly said the S&P should hold above the high 1,900s/2,000 level. "I think the uptrend remains as the economic data gets better. Earnings season will surprise on the upside. That should help the market," he said. Burkly said if oil could stabilize that would stave off further declines in energy-related shares and earnings.

Monday

8:30 am: Empire State survey

9:15 am: Industrial production

10:00 am: NAHB survey

4:00 pm: TIC data

Tuesday

Earnings: Burlington Stores, DSW, FactSet, Adobe Systems, Oracle

FOMC meeting begins

8:30 am: Housing starts

Wednesday

Earnings: FedEx, General Mills, Actuant, Williams-Sonoma, Herman Miller, Guess, Renren, Silver Wheaton, Jabil Circuit

7:00 am: Mortgage applications

10:30 am: EIA oil inventory data

2:00 pm: Fed statement

2:30 pm: Fed Chair Janet Yellen press briefing

Thursday

Earnings: Nike, Lennar, Vince Holding

8:30 am: Initial claims

8:30 am: Current account Q4

10:00 am: Philadelphia Fed survey

Friday

Earnings: KB Home, Darden Restaurants, Tiffany