Watch the Fed's Economic Forecast for Taper Clues
The economic forecasts of Federal Reserve officials could carry more weight than usual when traders dissect the Fed's message Wednesday afternoon, and it may provide more clues as to when the Fed could start to wind down its bond purchases.
First, though, traders will be watching for any changes in the language on the Fed's bond-buying program in the statement, to be released at 2 p.m. ET. In its most recent statement, the Fed said it could decrease or increase its $85 billion a month bond buying program.
They will also listen carefully to Chairman Ben Bernanke's comments about the bond-buying program and the economy when he speaks at 2:30 p.m. He told Congress last month that a paring back could begin after a few more meetings. That has led many to speculate the Fed will reduce bond-buying sometime between September and December.
Traders will also scrutinize the economic forecasts as well. If Fed officials surprise the markets and change their view to support a strengthening economy—one where a pullback, or "tapering," of bond-buying would make sense—it could advance expectations for a winding down of quantitative easing and lead to higher rates.
But if, as many expect, the Fed nods to slower growth than in its previous forecast, it could be a few more months before purchases are reduced.
"The presumption or the implication is they're going to leave taper open and relatively vague, so it's the nuance in the change in the forecast that becomes relevant," said David Ader, chief Treasury strategist at CRT Capital.
"There's nothing we're going to hear today that takes tapering off the table this year," said Ader, adding that the Fed could influence the market's interpretation of timing based on its forecast.
Fed officials expect growth of 2.3 to 2.8 percent this year,and PCE (personal consumption expenditure) inflation of 1.3 to 1.8 percent. They forecast unemployment of 7.3. to 7.5 percent. Ader said they could slightly trim growth, cut back on inflation and lower unemployment expectations.
Stephen Stanley, chief economist at Pierpoint Securities, looks for the Fed to reduce bond purchases soon, but not because the economy is improving. It's beginning to get concerned that its programs are affecting markets too much, he said. So the economic forecasts may not change significantly.
"My guess is they're going to try to find a way not to change them too much," he said. "I think the inflation numbers have to come down a 10th or two."
Wall Street economists expect growth this year of 2.3 percent, according to The Wall Street Journal. Stanley said the second half would have to have very strong growth of over 3 percent to match Fed expectations.
"If they raise them for growth, that would imply that they're looking for an explosive second half, and I would find that hard to swallow personally," Stanley said. "But ... to me that would be a strong sign that they are looking to taper sooner rather than later."
It's a pivotal inflection point for the markets, he said. They are "going to be looking at the language of the statement, and they're going to be listening to what the chairman's saying at the press conference. ... The only way the economic forecast plays a big role is if the rhetoric is unclear, and to me that would be a failure on the part of the Fed. Right now is a time they need to send a clear message."
The markets also could be reassured if the Fed delays tapering to year-end, said Ader, noting there are concerns such as the protests in Brazil and Turkey.
"There's some global uncertainties going on," as well as fiscal concerns and possible headwinds from Washington, he said.
Another topic at Bernanke's briefing could be Bernanke himself. President Barack Obama said this week that the Fed chairman has wanted to leave the position and has stayed too long. Fed Vice Chair Janet Yellen is widely viewed as the leading candidate to succeed him, but there are other possibilities, including former Treasury Secretary Larry Summers. Yellen's views are seen as similar to Bernanke's.
(Read More: Obama 'Essentially Fired' Bernanke: Meyer)
(Read More: Likely Candidates to Succeed Bernanke)
The Fed's QE program has been a security blanket for financial markets, pushing stocks higher and pacifying the bond market. But the idea that it is slowing has edged markets with insecurity and a lot of volatility. Many Fed watchers expect it to complete the wind-down of QE sometime next year, but the Fed is not expected to raise the fed funds target rate from its current zero until 2015.