Housing and jobs data will get a close look from traders Thursday, as they continue to dissect the latest comments from the Fed.
While the Fed statement and press conference Wednesday revealed little new, traders were buzzing about comments Fed Chairman Ben Bernanke made about tapering off asset purchases as the labor market shows improvement.
"It was a tweak," said one trader. But enough of a tweak to have bond traders watching a late day selloff, that took yields close to the day's highs. the 10-year was yielding 1.96 percent.
Stephen Stanley, chief economist at Pierpont Securities said Bernanke basically affirmed the view of many economists that the Fed will begin to pare back the $85 billion per month purchases of Treasurys and mortgages, starting in the fourth quarter. "In all these polls, economists think they'll start tapering in the fourth quarter…that's what I think is kind of embedded," he said. The Fed is expected to stop the purchases next year.
"What he said is we need to have something sufficient to stop QE," he said. Stanley said while Bernanke acknowledged improvements in employment, "he said we want to see this for a couple of months in a row before we get too confident about it. That tells me we are on auto pilot for at least three months and we can revisit it from there."
Unemployment claims, released at 8:30 a.m. ET is a number Stanley is watching Thursday. Claims last week fell to a surprising 332,000, and the number is expected to rise slightly this week.
"I think (jobless) claims does take on heightened importance because the numbers moved down so much. I expect them to remain low," said Stanley.
Societe Generale chief U.S. economist Aneta Markowska expects the Fed to start winding down quantitative easing, or QE, earlier than most. "I think there's a good chance they'll start tapering in the third quarter, probably closer to September than June," she said on "Fast Money." She said she expects to see data consistently improving by then.
"What the Fed told us today was the one clarification on the guidance for asset purchases was the significant improvement in the outlook for the labor market is when they will stop purchases…whenever that happens," she said. "I think it will be there at the end of the year. They'll start tapering possibly long before then."
Stocks, already higher on the day, gained steam just ahead of Bernanke's 2:30 p.m. briefing. The Dow ended up 55 to 14,511, and the S&P 500 closed up 10 points to 1558.
"We'll use models and other indicators of the state of the labor market to make a good estimate of how much we need to change the flow rate," Bernanke said, adding the point is to let the market see how the Fed responds to changes in the outlook.
Bernanke also said the Fed does not target asset prices and it is not measuring success in terms of the stock market. "We don't see anything at this point that is out of line with historical patterns," he said. "While the Dow may be hitting a high, it's in nominal terms, not real terms."
But he did acknowledge the Fed can help housing, and it is concerned that mortgage credit may be too tight. The Fed also commented on fiscal drag, a reference to the budget process in Washington and the sequester, or automatic spending cuts.
(Read More: Wall Street Betting Fed Keeps QE Coming: CNBC Survey)
The Fed downgraded its view of the economy slightly to GDP growth of 2.3 to 2.8 percent this year, from 2.3 to 3 percent. It also notched down growth forecasts for 2014 and 2015. But it upgraded the outlook for employment. In 2015, the Fed believes the unemployment rate will range between 6 and 6.5 percent, down slightly from an earlier range of 6 to 6.6 percent.
What Else to Watch
Housing has been one bright spot for the economy, and traders Thursday will be monitoring existing home sales data, released at 10 a.m. The Philadelphia Fed survey is released at 10 a.m. , as are leading indicators. The FHFA Home price index is released at 9 a.m.
Developments in Cyprus will also be monitored, after the markets shrugged off concerns Wednesday.