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Could the market have rallied itself into a rate hike?

The stock market selloff was seen as one reason for the Fed to hold off on a rate hike, but the market is rallying back and some say any more gains could be a catalyst for the Fed to hike.

The Fed begins its two-day meeting Wednesday and is expected to issue a statement Thursday afternoon that will reveal whether it has decided to raise rates for the first time in nine years, moving the Fed funds rate off of near-zero for the first time in nearly seven years.

Wall Street's economists are split on what the Fed will do, while the markets are not pricing in a hike for September, with just 28 percent odds reflected in fed funds futures. But the Treasury market sold off Tuesday, with a sharp jump in the two-year yield, sparking speculation that investors were positioning for a rate hike.

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One very strong view in the market is that the Fed, after holding rates low for so long, would not want to surprise a market that sees little chance of a rate hike until December or later.

There are few economic reports Wednesday but the one key for the Fed is the consumer price index, expected to be flat when it is reported at 8:30 a.m. There is also the National Association of Home Builders' survey at 10 a.m. and Treasury data on international capital flows at 4 p.m.

"Unless you have a big surprise in the CPI, I don't think it's going to move the needle very much," said Dan Suzuki, equity strategist at Bank of America Merrill Lynch. "I think at this point, the Fed has enough reasons to justify a rate hike. But it's hard to predict, and what they'll do is another thing."

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BofA economists expect a rate hike this week. "With the market (S&P 500) getting closer to 2,000 and the VIX levels getting closer to 20, I think that increases the likelihood the Fed is going to hike," said Suzuki.

Deutsche Bank strategist David Bianco on Tuesday morning noted in a report that if the S&P 500 is above 2,000, the Fed could hike, but below 1,900 would keep it on hold. The stock market's performance is one of the financial conditions monitored by the Fed, and Tuesday's 1.3 percent jump puts it just 6 percent off its high.

"I'm hearing that talk … I don't buy it," said UBS director of floor operations Art Cashin of the idea of an improving stock market pushing the Fed. He said higher oil prices helped drive the stock market higher Tuesday.

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The S&P 500 rose 24 points to 1,978, and the Dow was up 228 at 16,599. Bonds, meanwhile, sold off amid speculation the Fed would hike rates. The two-year yield jumped to 0.8 percent for the first time in four years, and the one-year was at 0.45 percent after a weakish auction. Ten-year yields also rose, to 2.28 percent in late trading.

"I think there was an awful lot of rejuggling of positons ahead of Thursday. You saw some short covering," said Cashin.

The VIX finished Tuesday at 22.54, off 7 percent. The VIX is viewed as a fear index for the stock market and is based on investments in puts and calls on the S&P 500.

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Suzuki said the 2,000 level on the S&P 500 is important in that it shows a good level of recovery for stocks. "It's a general level. Where we are now is in the ball park," he said. "These are just more normalized levels which would allow the Fed to hike. From a macro perspective, the data has been supportive of the Fed hike. The main reason the Fed wasn't going to hike was market based. With the market seemingly normalized and really calmed down, it makes more like the Fed is going to hike."

Besides the economic reports, there are a few earnings, including FedEx, Cracker Barrel, Oracle, Herman Miller and Analogic.

The CPI is expected to be flat, but core is expected to rise 0.1 percent, the same as last month. Core year over year is expected to rise 1.9 percent, up from 1.8 percent last month and still shy of the Fed's inflation target.

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