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Fed doves expected to fly even with rate hike coming

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Markets hope to hear from a dovish Fed Wednesday, even though Fed Chair Janet Yellen may send a strong message that the central bank is likely to raise interest rates this year.

The Fed is widely expected to hike rates for the first time in nine years in September. Ninety-two percent of the participants in CNBC's Fed Survey expect the central bank to begin raising rates this year, and the consensus is for 53 basis points this year, which would be the result of two quarter-point hikes.

"Our expectation is that the Fed is going to reiterate a desire to hike interest rates this year and signal it expects two hikes this year," said John Bellows, portfolio manager at Western Asset Management. "Next year, they are currently expecting something like four rate hikes. I don't think that's going to change. I think its two hikes in 2015 , four hikes next year."

"That is in some sense entirely consistent with what they've been saying all year. Just a few weeks ago, Janet Yellen laid out the case for hiking this year," Bellows said.

Fed officials began their two-day meeting Tuesday and will release a statement and new economic and interest rate forecasts at 2 p.m. ET Wednesday. Yellen also holds a 2:30 p.m. press briefing.

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"I think they want to keep September on the table. I think they don't want to make any decisions in June. They're teeing it up to see how it evolves. Every meeting is important before they pull the trigger. They'll do slight adjustments. They truly want to be constructive on the outlook, and they'll mention they're not pleased with the industrial sector not picking up, and that there's a lot of uncertainty in the world," said George Goncalves, Nomura rates strategist.

The Fed should sound optimistic on the economy thought it is likely to trim its GDP forecast based on the weak first quarter.

It is also expected to release a new "dot plot," or table with Fed officials' interest rate projections. That is expected to show a slower course of rate hikes. The market expects the Fed to hold interest rates lower for longer, and provide a slowly rising trajectory for rate hikes.

There is also some expectation the Fed could discuss its balance sheet. The hope in the bond market is the central bank will give some clues about what it might do to keep the $4.5 trillion balance sheet stable and whether it will continue to replace securities as they mature. An estimated $200 billion mature next year, while hardly any matured in 2015.

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"It might end up being a neutral statement, but because people are expecting a dovish Fed, it might come off as hawkish," said Goncalves. Markets will react if the Fed doesn't lower the "dots" in its forecast, he said. "The risk is the markets are expecting a lot from them because of these external things like Greece."

Stocks rallied Tuesday, with the Dow up 113 at 17,904 and the S&P 500 up 11 at 2,096. Traders said there was some relief that Greece's debt negotiations, though unresolved, might not be as bad a situation as some had feared. There was also optimism the Fed would soothe markets Wednesday. Treasury yields fell, with the 10-year at 2.31 percent in late trading.

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"The Fed is helping. You have a bias both on the day before, but more particularly when Yellen is speaking. I think people are setting up positions expecting we're going to get a bounce," said Art Cashin, director of floor operations at UBS.

Not everyone is convinced the Fed will hike in September, with Greece hanging over markets and questions still lingering about the state of the U.S. economy.

"I do think 'normalization' is a false friend," said Pascal Blanqué, global Chief Investment Officer for Amundi.

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"There are still reasons not to expect significant movement or any move. I think the jury is still out. My point is that you should look from a global perspective ... the combined effect of QE in Japan and QE in Europe, they are here to stay with us for some time. They will dominate the eventual impact of any early stages or normalization by the Fed across the U.S. curve. Europe and Japan combined effectively are producing and will continue to produce liquidity spillover effects basically leading European investors to buy any opportunity across the U.S. curve."

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On days when Yellen has spoken to markets, the stock market's performance has typically been positive. According to analytics firm Kensho, after her last 19 speeches since becoming Fed chair, the S&P was positive 63 percent of the time with an average return of 0.24 percent. On the 10 days when the Yellen Fed issued a post meeting statement, the S&P was higher 60 percent of the time with a return of 0.19 percent. On days when Yellen held a post meeting briefing, like Wednesday, the S&P was up 80 percent of the time, with a return of 0.7 percent.

Performance of the Market on FOMC Days with Presser (five occurrences), according to analytics firm Kensho

There have been 10 FOMC meetings, but five with press briefings since Yellen has been Fed chair (since February 2014).

On days when Fed statement followed by press briefing:

•The S&P is up 80 percent of the time with an average return of 0.70 percent

•The Dow is also up 80 percent of the time with an average return of 0.59 percent

•Materials is the best-performing sector with the combination of being positive 80 percent of the time with an average return of 1.02 percent

-Note: Energy actually has the highest average return of 1.28 percent, but is only positive 60 percent of the time

•Staples is the worst-performing sector with the combination of being positive only 60 percent of the time with an average return of 0.44 percent

-Note: Industrials have a slightly lower average return of 0.41 percent but are positive 80 percent of the time

•WTI crude futures are positive 60 percent of the time with an average return of 0.70 percent

•Gold is positive 60 percent of the time with an average return of -0.20 percent

•The 10-year note yield is positive 60 percent of the time with an average return of 0.09 percent

•The dollar index is positive 60 percent of the time with an average return of 0.19 percent

—CNBC's Gina Francolla contributed to this story.

—Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.