The Federal Reserve's message to markets Wednesday should be more dovish than not, despite the mixed signals officials have been sending.
Fed Chairman Ben Bernanke has said the Fed will ease until employment and the economy improves and on Monday he reiterated that the economy is not doing as well as the Fed hopes it would be doing. But other officials have recently been less dovish.
San Francisco Fed President John Williams, for one, sent perhaps the biggest jolt last week when he said the Fed could begin to taper off asset purchases in the summer, earlier than the markets had expected. But traders since shrugged off those comments after the disappointing March nonfarm payrolls Friday and other soft data convinced them that the jobs recovery could be stalling and the Fed would continue its easy policies for quite a while.
(Read More: US Job Creation Plunges, but Rate Drops to 7.6%)
The Fed releases minutes of its March meeting at 2 p.m. Wednesday, and while they are expected to show dissent, the overall message should match that of Bernanke. The Fed will also release its quarterly summary of economic projections. Three Fed officials also speak Wednesday, including Atlanta Fed President Dennis Lockhart at the Atlanta Fed conference at 8:20 a.m., and Minneapolis Fed President Narayana Kocherlakota, who speaks at the same conference at 8:30 a.m. Dallas Fed President Richard Fisher speaks at 5 p.m. at the University of Texas.
"If in reviewing the effectiveness of QE [quantitative easing]], the market interprets any of the Fed comments as skewing the probability of ending QE in the near term as higher or lower, the market could react," said Ian Lyngen, senior Treasury strategist at CRT Capital. The Fed, in its current quantitative easing program, is currently buying $85 billion in Treasurys and mortgage securities each month.
Milton Ezrati, strategist and senior economist at Lord Abbett, said he believes the mixed messages are intentional. "I think Bernanke is orchestrating. He seems to lead the dove group … he's shown in his speeches he's very aware of the longer-term concerns with his programs," he said. By allowing other Fed officials to air their concerns about the longer-term effectiveness of the programs, "he allows people to feel they have an advocate."
Ezrati said the weaker economy could make the message more uniform. "They'll change some of the wording and…it will be a difference without a distinction. Very little has changed from the Fed's point of view that will change the language of the FOMC [Federal Open Market Committee]."
"I think the bottom line is that it's going to be following the (Fed Vice Chair Janet) Yellen and Bernanke's lead, but he's going to allow vocalizations of the alternative view," said Ezrati.
Besides the Fed, traders are watching the $21 billion 10-year auction at 1 p.m. and President Obama's release of his budget, expected to include cuts to entitlement programs.
"What's the old saying? Dead on arrival," said Steve Massocca of Wedbush Securities. "It's going to be too conservative for the Senate and too liberal for the house. It's probably marks some kind of beginnings for negotiations but I don't know that they get there. I don't think the Republicans will endorse any kind of tax increase that's going to make Obama happy. I think this is going to be the 2014 election. That's what this is going to be about."
(Read More: Obama Budget to Cut Spending, Call for Higher Taxes)
Ezrati said the Obama and the Republicans are getting closer together. "I'm surprised Obama is talking anything different than the Senate already produced, and he is talking about measures to control entitlement spending, which is astounding, if it's true," Ezrati said. "It is interesting that the sides really have moved marginally closer together."
Art Cashin, director of floor operations at UBS, said the budget could be market moving. "It's possible. There are a lot of rumors it includes restrictions on 401(k)s," he said.
Stocks staged a rally Tuesday that took the Dow up 100 points before it gave back some gains. The Dow ended the day up 59, at 14,673, a new closing high, and the S&P 500 was up 5 at 1568.
"Nothing's happening in Europe, nothing in Korea, the streets of the Middle East are quiet, and bargain hunters waiting the buy the opening dip didn't get an opening dip. So they had to start muscling each other out of the way," said Cashin. "The run rate is 50 to 80 million shares more than yesterday. It's more a pleasant spring day rally."
Lyngen said the $21 billion auction of reopened 10-year notes could be important. The 10-year yield was slightly higher at 1.75 percent in late day trading. "I think the market was interested to see if foreign bidders came out to participate in today's three-year auction, and they didn't. I think it raises the stakes for the 10-year," he said.
There are also a few earnings Wednesday. CarMax, Constellation Brands, Family Dollar, Fastenal and Progressive report in the morning. Bed Bath and Beyond and Ruby Tuesday reports after the close, and Chevron issues interim results.