Now that the Fed has turned up the heat around a possible December rate hike, the question is whether the economy will play along.
First up in Thursday's data are the 8:30 a.m. EDT scheduled releases of third-quarter GDP and weekly jobless claims. Third-quarter growth is expected to have slowed significantly to less than half the second quarter's pace, but unemployment claims should again come in around the lowest rate in years.
The Fed on Wednesday issued a surprisingly hawkish post-meeting statement, commenting specifically that it will be looking for progress in employment and labor when considering a rate hike at its December meeting. The fact the central bank specifically mentioned its next meeting immediately triggered a significant move up in market expectations for a Fed rate rise this year.
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"There are two things in here that I think give people a little bit of a jolt. One is they seemed to downgrade their concerns about the global backdrop, which I think makes sense. The markets have settled down and people have started to look at China with a little less fear," said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch. Harris said the other point is that Fed officials made it clear there will be a serious discussion at the December meeting about whether to hike rates or not.
In response to the midafternoon statement, stocks immediately plunged, then rebounded to close sharply higher. Bond yields rose, particularly , which is most sensitive to Fed policy.
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"The fact that (the markets) were pricing a 1-in-3 chance that the Fed could hike in December was probably too low for comfort, and I think their goal at this meeting was to get to 50/50 and they hit it right on. That's what the markets are pricing right now," said Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management.
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Caron said the Fed didn't want the market to price in low odds in case it does decide to raise rates in December. "The reason they don't want the market in that position — Let's say the data gets better and the market gets surprised. It could be more detrimental to equities and other risk assets," he said.
While Fed Chair Janet Yellen and other officials have said they want to raise rates before the end of the year if the economy is strong enough, the markets had taken conflicting central bank comments as wishy-washy and confusing about both the timing and intentions for a rate hike. The Fed's inclusion of its concerns about international developments in its September statement had flustered markets even more and created further worries about China's sluggish economy.
But the Fed also had to contend with a stream of softening U.S. data, that will show up in the weak third-quarter GDP.
The committee said in its statement that in determining whether it would raise rates at its "next meeting," it will assess the progress toward "its objectives of maximum employment and 2 percent inflation." At the same time, it pointed to mixed signals in the economy, as it noted the "pace of job gains slowed" but household spending and business investment increased at "solid rates" in recent months.
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"When you look at GDP, the third-quarter number is a very distorted number so you probably put low weight on it. We have GDP coming in at 1.5 percent. If it weren't for the big drop in the trade balance and the big drop in inventory investment, you'd be more like a 3.5 percent quarter," said Harris. "The trade weakness is likely to persist ... inventories grew too fast at the start of the year."
Diane Swonk, chief economist of Mesirow Financial, said the economic releases Friday will be more important to the Fed's decision, particularly the employment cost index. Personal income and spending will also be disclosed. She said if there was any sign wages are picking up, it could help with the fact that inflation is well below the Fed's 2 percent target.
"I think the economy is strong enough, but is inflation going to be the dog that doesn't bark?" she said.
Economists said the more important data will be the monthly employment reports, and in general, October and November data which will show if September's weakness persisted. The Fed has given itself the ability to adjust to weakness or improvement.
"I think the issue is they effectively regained flexibility. They went too far in September which was clear from Janet Yellen's ambiguity. They reset the clock on December, and they still have flexibility and an escape hatch," Swonk said.
The stock market's post-Fed surge surprised some market participants. The Dow closed up 198 at 17,779, and the rose 24 to 2,090. The Nasdaq climbed 1.3 percent to 5,095, but the Russell 2000 jumped 2.9 percent to 1,178.
"Traders have been looking for the rally to broaden and continue, and they got a bit of that as the banks liked what the Fed had to say, and the Russell played a little catch-up. If oil would just stop leaking, this trend that's been in tact since the double-bottom lows in the S&P could extend back to highs," said Scott Redler, partner with T3Live.com.
Redler said the rally could continue into the year-end. Oil did surge as well Wednesday, giving a boost to stocks. West Texas Intermediate crude futures for December rose more than 6 percent to $45.94 per barrel.
Ari Wald, technical analyst at Oppenheimer Asset Management, said the market could take a rest in the near future. "We've been in rally mode since the start of the month," he said. "Now there are some resistance levels we have to watch. Now that the sentiment pendulum has swung back toward optimistic, some of that fire power was used up. I wouldn't be surprised to see the market digest some of these gains. Maybe in the early part of November. For now, we're playing the game where pullbacks can be bought."
Besides claims and GDP, pending home sales are also scheduled to be reported at 10 a.m. and should show a gain 1 percent in September, after a decline in August.
Earnings expected Thursday include Royal Dutch Shell, ConocoPhillips, MasterCard, Sanofi, Delphi Automotive, Nokia, Sony, Johnson Controls, Fortress Investments, Oshkosh, Alexion Pharma and Air Products, before the bell. Baidu, LinkedIn, Boston Beer, Starbucks, Electronic Arts, First Solar, Western Union, Outerwall, Eastman Chemical and Biomarin Pharma are among the companies reporting after the market close.
Atlanta Fed President Dennis Lockhart speaks at 9:10 a.m. ET in Washington on a workforce development panel discussion.