Strategists expect to see the biggest moves at the short end of the yield curve, as it is most sensitive to rate hikes. The dollar, weaker Wednesday, could also be a big mover and provide the lead for stocks and commodities such as oil and gold.
What to watch:
Patient—Removal of this word from the Fed statement is widely expected at 2 p.m. EDT. That would signal the central bank is on track to raise rates, and that a June hike is possible. But the Fed could also modify the way the phrase is used, and that could be perceived as dovish. Economists mostly expect the first hike in June or September.
Inflation—The Fed has been fairly conservative in its inflation forecasts, with a longer-term expectation of 2 percent. But inflation has been stubbornly low, and the Fed could lower its near-term forecast, which is currently at 1.0 to 1.6 percent for 2015. If it does make changes, that could be perceived as dovish, since it may prolong the period before or between rate hikes.
Unemployment—Employment, the second of the Fed's dual mandate, has been a bright spot, shifting the focus to weak inflation. If the Fed sees a more aggressive fall in unemployment, the market could view that as hawkish, and also conjecture an increase in wage pressures. Its current longer-run forecast is an unemployment rate of 5.2 to 5.5 percent.
Dollar—The greenback has been calling the tune for financial markets around the world. While the Fed is unlikely to mention it in its statement, its chair, Janet Yellen, could mention it at 2:30 p.m. when she speaks to the press. The rising dollar has pressured U.S. stocks, for fear it could damage corporate profits and U.S. exports. The dollar is also viewed as deflationary since it has been weighing on commodities prices and emerging markets.
Deutsche Bank says Yellen isn't likely to discuss the appropriateness of the stronger dollar, but that she may talk about it in the context of financial conditions.
"Yellen's comments acknowledging the stronger USD's potential impact on growth, will, we assume, be met with a small negative USD reaction. (that is the direction of 'the pain trade') but sustained follow-through is likely to be limited," Deutsche analysts wrote.