Markets read the Fed's cautious tone on the economy and financial conditions as a sign it is not likely to hike rates in March.
However, analysts say any favorable change in conditions could put March back in play for the Fed's second rate hike since it moved off its zero interest rate policy in December.
The central bank released its post-rate meeting statement Wednesday afternoon, triggering a steep sell-off in stocks, a drop in the dollar and buying in Treasurys.
"If this was the March meeting, and they were looking at the same set of circumstances I just read from today's statement, they'd be reluctant to raise rates," said John Briggs, head of strategy at RBS.
Briggs said the market was pricing a 24 percent chance of a March rate hike after the 2 p.m. ET Fed statement, from a 31 percent chance ahead of the release.
"To me it says that we've still got six weeks of data and developments, and the current market pricing of a 25 percent chance is too low. To me, it says it's more like 50-50," said Briggs. "They're watchful. Watchful is very different from worried."
The Fed had previously mentioned concerns about global conditions in September, when it surprised markets by holding off on a rate hike. Briggs said the central bank's reference then to international concerns was far more negative than the comment in Wednesday's statement. He said the Fed in September noted that global economic and financial circumstances could restrain economic activity and put further downward pressure on inflation.
In Wednesday's statement the Fed said it is "closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."
"I think that's really important," Briggs said of the difference in the two statements. "They're still saying they are on plan with a gradual reduction in accommodation but they recognize things are going on out there."
The Fed tweaked its view of the U.S. economy, noting that growth has slowed, business investment has moderated and inventory investment has decelerated.
The central bank also added language that says inflation is expected to remain low in the near term due in part to further declines in energy. But it sees the effects as transitory.
Stocks sold off with the Dow down nearly 1.4 percent on concerns that the Fed could now be signaling weaker growth with its comments but not offering fresh guidance on rate hikes. In the Treasury market, yields moved lower, and the Fed sensitive yield went to 0.84 from 0.88 earlier. The 10-year was at 2.00 percent.
The dollar moved lower, and gold went higher on the expectation that the Fed would be slower to raise rates. The central bank has forecast four rate hikes for this year while the markets have been expecting just one.
"While the Fed may still feel some of these factors are transitory, they cannot look past this tightening of financial conditions," said Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management.
"This tells me March is probably off the table, unless we see a change."
Peter Boockvar, chief market analyst at Lindsey Group, said the Fed is clearly signaling if it were to vote to hike now, it would hold off, but is not eliminating the possibility it could do so in March. The Fed continued to emphasize that its rate decisions depend on the strength of economic data.
Boockvar said it's key that the Fed once more mentioned global concerns, as it had in September. "They are softening their economic commentary. They can't be inconsistent and then hike. You can't make a call on March based on this. All I'm saying is if you fast-forwarded and in March, you had the same circumstances, they'd be reluctant to raise," he said.
"I think stocks just don't know what to do with the information. On one hand the Fed's not going to raise, yay — but on the other hand if the macro environment is so difficult the Fed can't raise rates than that's a problem in itself," said Boockvar.
MUFG Union Bank's chief financial economist, Chris Rupkey, said the Fed is cautious but could still hike in March.
"We view the words 'reasonably confident' and 'global' as meaningless word changes and still expect the gradual pace of hikes this year to win out. Don't be quick to dismiss the odds of a March 16 rate hike simply because they are no longer 'reasonably' confident and tie that to the close monitoring of financial markets and the global economy," he wrote.