Despite efforts of some Fed officials to remain above the fray of recent market volatility, the policy statement from the central bank after next week's meeting seems likely to offer investors some relief that the Fed is not hell-bent on four rate hikes this year.
European Central Bank President Mario Draghi in effect showed the Fed the way on Thursday, with his call for possible additional easing in March based on changed data since the last ECB meeting in December.
There have been meaningful changes in the United States since the last Fed meeting that call for changes in the central bank's language and in its forecast. The CNBC Rapid Update (an average of economists' tracking forecasts) is now running at just 1 percent for the fourth quarter, down from 2 percent when the Fed met in December. Most of the data so far this year have come in weaker than expected. Oil has declined 15 percent since the last Fed meeting and the S&P has plunged 9.8 percent.
Among the possible responses in the statement (there is no news conference) is for the Fed to acknowledge the softer data and a reduced growth outlook. The Fed could also make note of the market volatility and the decline in stock prices creating an unwelcome tightening of financial conditions. The Chicago Fed reported Thursday that its Financial Conditions Index grew tighter for the 10th straight week.
The Fed could also note that there is more uncertainty that inflation will edge up toward its 2 percent target because of the sharp plunge in oil prices. Draghi on Thursday said the outlook for 2016 inflation is now "significantly lower" because of the declines in crude.
Finally, the statement could underscore the data dependency of future rate hikes. Some in the markets have culled from recent Fed comments an impression that policy is on auto-pilot, that rates will rise four times this year, plus or minus, irrespective of the data.
That's not what the Fed has said. But the failure of known doves like New York Fed President Bill Dudley to make much mention at all of the recent market volatility or to indicate a slower pace of rate hikes disappointed markets last week.
While Draghi signaled additional easing, the Fed is thought to be a long way from that. It will likely give an impression of a Fed that is flexible in the face of greater uncertainty, aiming in its statement to convince markets that the four rate hikes are not a foregone conclusion.
Many in the market heard only Fed Vice Chair Stan Fischer say in a CNBC interview earlier this month that four rate hikes were "in the ballpark" for 2016. They overlooked the rest of the quote, where he said, "You know, the reason we meet eight times a year is because things happen, and as they happen, you want to adjust your policy. Otherwise, we could meet in January and close down shop until a year later. But we have to react to incoming events, and we will react to them."
For now, that reaction likely means the Fed will signal a "time out" on further hikes, according to Evercore ISI Fed observer Krishna Guha. He titled his piece Thursday "The Central Bank Cavalry Is Coming (Late.)"
"We believe that the dovish ECB meeting today is a prelude to further dovish action from the Fed and Bank of Japan next week,'' Guha said.
Former Fed Gov. Randall Kroszner in a CNBC interview said recent events make him believe the amount of Fed tightening this year will be less than he thought than in December. "When the fed initially made their announcement, the markets thought it would be two or three, not four," Kroszner said. "My guess is that is quite reasonably moving down to no more than two or and perhaps maybe one."
But the Fed will choose its words carefully. It was criticized in September for not hiking in the face of global market volatility and the some inside the Fed thought they missed an opportunity to hike.