"I think even if they were to hike 25 basis points in December, it's not a tightening. It's just a removal of accommodation and I think they want to make that very clear so as not to derail the rally in risk assets," said Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management.
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Caron said the Fed could explain in its 2 p.m. EST release that the environment has changed since September, when it surprised markets and held off hiking rates due to concerns about financial markets and overseas conditions. "China was imploding. Equities were tanking. October saw a significant return and reversal of asset prices," he said.
The central bank is also likely to point out that its path to normalization should be very slow, he said. "Slower than previous paces of rate hikes," Caron said. "I think they're going to try to prevent any kind of taper tantrum."
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There are also a number of Fed speakers Wednesday, including Richmond Fed President Jeffrey Lacker, who will be on "Squawk Box" at 8 a.m. ET. New York Fed President Bill Dudley, Cleveland Fed President Loretta Mester and Atlanta Fed President Dennis Lockhart are on a panel in the morning at the Clearing House Annual Conference in New York.
Dallas Fed President Rob Kaplan speaks at noon on the economy and Fed policy, and former Fed Chairman Ben Bernanke will be at the Economic Club of New York at noon.
Oil could also remain a factor Wednesday. There is government inventory data expected at 10:30 a.m. ET, after American Petroleum Institute data Tuesday afternoon showed a small stockpile draw.
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"I still expect to see a build ... probably just around a million barrels," said John Kilduff of Again Capital. Oil inventory data have shown big increases in U.S. supply in recent weeks and that has been a factor weighing on oil prices. West Texas Intermediate oil futures rose slightly above $41 per barrel in late trading after declining close to $40 in Nymex trading.
Caron said oil is getting a disproportionate amount of attention from investors. "All roads lead to inflation and what's happening in oil. It is the absolute nexus and linchpin that is moving market sentiment up and down," he said.
Ablin said big moves in oil are often negatives for stocks and other risk assets. He looked at the correlation between a 3 percent or greater weekly decline in oil futures, and the performance of things like high-yield bonds, emerging markets, master limited partnerships, dividend stocks, gold, REITs and preferred stocks.
The worst performer was MLPs, down an average 3 percent, and the best was preferred stocks, the only positive asset with a gain. Preferreds were up just an average 0.1 percent.
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The S&P 500 averaged a 1 percent decline, and emerging markets were down 1.7 percent. There were 17 weeks where there was a 3 percent or more drop in oil futures during the past 50 weeks.
Stocks were mixed and barely changed Tuesday, after reports of bomb threats in Germany sapped gains in afternoon trading. That followed a strong surge in stocks Monday, as markets shook off worries about the coordinated Paris terror attacks that left at least 129 dead and dozens injured on Friday night.
"I think the cancellation of the German soccer game looked like it coincided with the falloff. One isolated event alright, but if you start getting a few of these things, the market's going to be concerned. Right now we're (U.S. stocks) are the flight to quality, but who knows," Ablin said.
He said the idea the Fed could drop its rate hiking plans if the economy is hurt or the terror situation worsens had helped lift stocks Monday.
Caron said terrorism events tend to have transitory impacts on markets, but another incident might cause more of a reaction. ISIS, or the so-called Islamic State, claimed credit for the Paris attacks, and also the downing of a Russian airliner over Egypt. The situation in Germany was unclear, after a soccer stadium was evacuated Tuesday night due to a bomb threat.
Analysts have said one outcome after the Friday terrorism attacks is that the European Central Bank, already expected to ease Dec. 3, could be even more committed to doing so. This expectation could make the move in the euro/dollar pair even more aggressive, with the euro reaching parity in the next couple of months as the Fed moves in the opposite direction of the ECB.
The euro was lower at $1.06 Tuesday. "We know $1.05 is sort of a boundary on the bottom, at least it has been this year," Caron said. "If we take that out, people will be talking about 90 to 95 (cents) pretty quickly." Caron said investors seem to be waiting to see what ECB President Mario Draghi will do with deposit rates and easing. Speculation is that the ECB will cut the discount rate by 10 basis points and expand QE, possibly adding in muni bond purchases.
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Caron said he could see the euro reaching parity with the dollar in the first quarter.
Besides the Fed minutes, traders will be watching housing starts and building permits, reported at 8:30 a.m. Retailers Target and Lowe's also report earnings. Both Home Depot and Wal-Mart rose sharply Tuesday after earnings, countering a batch of negative moves in big retail names last week.