Even with spotty economic data, the unofficial odds are rising that the Fed will announce plans at its December meeting to taper its bond-buying program.
But a number of Fed watchers still believe it's more likely the Fed will take action to cut the $85 billion a month in asset purchases in January or March. Bond yields have been rising on the possibility, and stocks have floundered this week.
Wednesday's stronger-than-expected ADP report showed that private sector hiring rose in November at the highest rate in a year. That, in turn, gave rise to speculation that the government jobs report on Friday will also be better than expected. ADP said 215,000 new jobs had been added to private sector payrolls, well above the 170,000 expected.
Economists look for 180,000 nonfarm payrolls in November and an unemployment rate of 7.2 percent, according to Reuters. That compares with October's surprise gain of 204,000 jobs and bump in the unemployment rate to 7.3 percent.
"The more that strong data comes in the probability goes up [for Fed tapering], but it's unlikely it will go above 50 percent" for December, said Pimco strategist Tony Crescenzi. "The Fed has not paved the way yet. It hasn't prepared markets, so it will probably take a bit more time. Stronger data rolling in are fresh, and the Fed doesn't react to short-term spates of data. It reacts to cumulative data. It doesn't alter the chances for December, but it does keep in place January and February, and reinforces the probability that have been assigned to those months."
Mesirow Financial economist Diane Swonk said she sees about a 45 percent chance that the Fed will act in December.
"I think what financial markets have really underestimated is how much the Fed would like to pivot," Swonk said. "The question is are financial markets ready for it or not." She said the Fed has an opportunity to use its December meeting statement to clarify its message on wind down the quantitative easing program, while also emphasizing that it plans to keep short-term rates near zero for a long time.
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"The bloodshed is not going to be what it was. Markets have been through this dance before. The markets need to focus on how good is this retail season. The economy is still not that great," Swonk said, adding that many carry trades were unwound during the summer.
Markets had been primed for the Fed to announce a pullback in bond purchases in September, but it held off and said it was concerned about the economy and possible fiscal headwinds. But now that the jobs numbers appear to be on positive trajectory and the risks of another fiscal disruption have decreased, traders expect to see the Fed move within the next few months. But the actual timing is a mystery, and street expectations have shifted.
Ahead of the September meeting, bond yields rose, with the 10-year briefly touching 3 percent. Yields have been rising this week, as some data surprised positively, and the 10-year reached 2.85 percent Wednesday, the highest level since Sept. 18. The ISM manufacturing survey Monday was stronger than expected. However, the survey Wednesday showed a surprise slowdown in services sector activity and employment expanding at a lower rate.
Bespoke's Economic Indicator Diffusion Index shows that more economic indicators are coming in ahead of estimates than there had been in recent weeks, but the index is still weighed down by more misses and hasn't been positive since Sept. 12.
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Traders will be focused on Thursday's data, which include weekly jobless claims and third-quarter GDP at 8:30 a.m. ET. GDP is expected to be up 3.2 percent, after a first reading showed it gained 2.8 percent. Factory orders are at 10 a.m., and chain stores report on November sales during the morning.
Swonk expects third-quarter growth to come in at about 3.3 percent but said the Fed will look past the headline number.
"The current quarter looks around 1 percent," she said. "They're looking at the fact that it was driven by inventories and not the right way to get there. … We slowed down over the summer on demand and that's what the Fed cares the most about. It's a complex decision they've got to make."
Stocks Wednesday were mixed with the Dow and lower, and Nasdaq less than a point higher at 4,038. Reports about a budget deal in Washington propped up stocks midday, but they sunk later. The Dow finished off its lows at 15,889, down 24. The S&P was down 2 at 1,792.
A budget deal in Washington would slightly tip the odds in favor of earlier tapering, since traders still see budget feuding as a point of concern for the Fed. The continuing resolution to fund the government runs out Jan. 15 and budget conferees are hoping to have a proposal by the end of next week.
David Ader, chief Treasury strategist at CRT Capital, said a big jobs number on Friday could get the Fed to act in December.
"I'm leaning toward 200,000-plus nonfarm payrolls," he said. "I'd say the odds are 75 percent for an announcement of a tapering to begin in January. I think it would be very modest. I think the Fed is concerned about it."
If the employment report hits the consensus number and comes in at about 180,000, Ader said, it would be ambiguous and not clear what the Fed would do.
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Swonk said the Fed is concerned about the impact its withdrawal would have on the mortgage market, but also about continuing the program for too long as the Treasury issues fewer bonds and the Fed buys up the available mortgages.
She expects to see about 160,000 nonfarm payrolls for November.
"If they get 250,000, slam dunk, they are going to do tapering," Swonk said. "If we get 200,000, there's a 55 percent chance they don't" move in December.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.