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Markets hang in the balance ahead of Fed decision

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The Federal Reserve will release its policy statement on Wednesday, and the decision could heavily impact stocks, bonds and gold. The tricky part is that while most expect the Fed to taper quantitative easing by another $10 billion, the outlook for guidance on the federal funds rate is significantly cloudier.

"What the Fed says, and the language contained in that statement, will be imperative for us moving forward," said Jeff Kilburg, CEO of KKM Financial. "The Fed has been driving the market for so long, and it continues to drive the market."

The Fed meeting starts on Tuesday, and the Federal Open Market Committee is set to release its policy statement on Wednesday at 2:00 p.m. ET. The real excitement could come a bit later that afternoon, when Janet Yellen gives her first press conference as Fed chair.

Most economists expect the Fed to taper asset purchases by another $10 billion, reducing the size of quantitative easing to $55 billion per month.

"They're going to taper another 10—that's almost a given. In fact, it is a given," said Deutche Bank's chief U.S. economist, Joseph LaVorgna.

"You can take that to the bank. That's not going to change," agreed David Robin, co-head of financial futures and options at Newedge.

(Read more: Improving US economy not enough for Fed to back off: Dudley)

But when it comes to the federal funds rate, the question of what the Fed will do becomes more complicated. In the FOMC's previous statement, the Fed reiterated that it would keep that key rate ultralow as long as inflation is not projected to rise more than half a percentage point above 2 percent, and the unemployment rate remains above 6.5 percent.

The Fed does go on to clarify that it will be appropriate to keep that rate between 0 and 0.25 percent even after the unemployment rate falls below 6.5 percent. But with unemployment just above that level now, the Fed may look to update its guidance.

In fact, LaVorgna says that the Fed will abandon its quantitative guidance completely.

"They're going to take a mulligan on the quantitative language and go qualitative—go old school," LaVorgna predicted. "They will provide a range of factors and leave it to the market to figure out what will matter most."

Federal Reserve Board Chair Janet Yellen as she testifies during a Senate Banking, Housing and Urban Affairs Committee hearing while delivering the Fed's semiannual Monetary Policy Report on Feb. 27, 2014
Getty Images

This would be just one of many recent changes in the Fed's guidance structure.

"They started off with calendar dates, then they changed to numerical targets, then they did a September nontaper, then they released a clunky and confusing December statement, then they just dumped that statement into January. And all of the sudden it seems clear that they're going to change their forward guidance and go qualitative," he said.

At this point, the Fed's credibility has been saved by the low rates, the relatively strong stock market and the lack of inflation, LaVorgna said. But all the switches could come back to do damage.

"Eventually, when the time comes to move rates, some of this could come back and hurt the Fed's credibility," LaVorgna said. "They're getting a lot of free passes, but eventually their luck is going to run out."

Newedge's Robin, on the other hand, sees the Fed staying put for the time being.

(Read more: February jobs growth hit by weather: Fed's Plosser)

"I have heard the chatter that the Fed will shift from quantitative to qualitative guidance, but I am hard-pressed to see them do that just yet. That would increase risk premiums at a time when risk premiums are a bit unsettled on their own," Robin told CNBC.com. "They have a window to leave things as they are" due to the possible impact of the weather on recent economic data.

"I think they'll wait to see the April data series," Robin said. "The Fed is not going to want to create more difficulty for the marketplace at a time when they're earning back some pretty hard-won credibility."

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

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