Data-dependent Federal Reserve officials suddenly are finding the data turning against them.
A year that was supposed to provide the Fed with plenty of ammunition to justify a rate increase has fallen considerably short. Economic growth remains mired, inflation increasingly has become a bygone remnant of years past and industrial activity is nearing contraction levels.
Moreover, the stock market is tumbling, investors' nerves are frayed and a government shutdown, narrowly averted for October, looks increasingly probable in December, right around the time the U.S. central bank gets its final opportunity to start normalizing interest rates.
On top of it, corporate America has seen a few high-profile episodes of mass layoffs, which spiked in September thanks to Hewlett-Packard jettisoning 32,500 workers. Analysts expect companies to post a 4 percent decline in third-quarter profits, which will be lucky to break even for the year.
This is the environment into which the Fed is looking to raise rates.
Market participants are growing increasingly skeptical that a hike is coming anytime soon.
"What's really convinced me the Fed is going to stay lower for longer is the evidence would have to be overwhelmingly clear in one direction," said Michael Arone, chief investment strategist for State Street Global Advisors' U.S. intermediary business. "In this environment, the Fed is incredibly fearful of making a policy mistake, moving too soon and undermining economic growth."
The evidence for a rate hike, considerably stronger earlier in the year, has grown weaker. Futures trading indicates the probability of an October move at 14 percent, while December is at 41 percent and January a tossup at 50 percent.
Read More The Fed may be 'losing grip on market prices'
Thursday brought a fresh round of troubling news: The Institute for Supply Management's registered a 50.2 reading, just a notch above indicating contraction in the sector. Outplacement service Challenger, Gray & Christmas reported a 43 percent surge in planned layoffs, and stocks surrendered what looked like a second day of solid gains as biotech shares once again plunged.
After a 3.9 percent bounce in the second quarter offset a meager 0.6 percent gain in the first quarter, gross domestic product appears headed for another lackluster reading. Barclays, for instance, on Thursday slashed its expectations for Q3 down to 1.5 percent growth, and the Atlanta Fed GDP tracker is looking for a 0.9 percent increase, revised sharply lower Thursday from 1.8 percent just a few days ago. Over the past month, a Bespoke Investment Group measure of economic indicators moved to a near "neutral" trend and is likely to turn negative.
Investment houses on Wall Street, meanwhile, have been lowering their market expectations for the year, with Goldman Sachs earlier this week cutting its projection down to 2,000 from 2,100. The index was off 7.4 percent year to date as of Thursday afternoon trading, and hopes for a positive year are diminishing.
Read More RBC slashes S&P 500 call, but loves stocks (huh?)
Perhaps most important in the Fed's eyes is the lack of standard of living growth. Wages have been mired in a disinflationary spiral while undermployment remains high and labor force participation is at levels not seen since the Carter administration. A government measure that goes beyond the headline rate and measures those underemployed and not actively looking for work sits elevated at 10.3 percent.
When Friday's jobs numbers hit the tape — expectations are for payrolls to grow by 206,000 and the unemployment rate to hold at 5.1 percent — Fed officials will be looking past the headlines.
Their focus more likely will be turned toward the internals of the much-watched Bureau of Labor Statistics report — namely less-glamorous metrics like wage growth, hours worked and the percentage of people working part time for economic reasons. Such details will be important for the Fed, which is looking for a reason to raise rates even as its success in filling either side of its dual mandate wanes.
"The primary focus and what's going to keep them on hold is the lack of meaningful wage inflation and inflation overall," State Street's Arone said.
Indeed, what likely keeps Fed Chair Janet Yellen and her colleagues awake at night the most is failing at not one but both of their mandates for full employment — which would trigger solid wage gains — and price stability, which not only entails controlling inflation but also avoiding deflation.
Ultimately, a confused and conflicted Fed makes for confused and conflicted investors, particularly in an environment where the financial markets have leaned so hard on the central bank.
"There's a risk that the Fed does the right thing at the wrong time," Mohamed El-Erian, chief economic advisor at Allianz, told CNBC.
Read More El-Erian: Emerging markets are 'completely unhinged'
Investors have been piling into money market funds, putting $17 billion into the zero-yielding instruments last week while pulling $7.3 billion from U.S. equity funds. Sentiment is battered as well, with bullishness on the American Association of Individual Investors' weekly survey falling to a six-week low of 28.1 percent, and in the process setting a record by registering below the average of 39 percent for 30 straight weeks.
Investors beset by volatility, then, probably should get used to it.
"Until we get some clarity on the direction of interest rates, until investors get comfortable that the economic slowdown in China isn't going to leak into an emerging market contagion and global recession, I think we're likely to have continued volatility," Arone said. On Friday's jobs report, he said, "For those looking looking for the aha moment, it's just not going to come."
