Stocks were lower Tuesday as markets reacted to Brexit worries, but traders were not concerned about any surprise message from the Fed. The S&P 500 closed at 2,075, off three points but below its 50-day moving average. The index closed well off its lows, rising off support near the 2,064 level. Bond yields reversed course during the day, with the 10-year slightly higher at 1.61 percent in late trading. The German 10-year bund yield sunk to a negative level for the first time ever.
"Events like [Brexit] typically create opportunities, particularly if the vote is to stay," said Quincy Krosby, market strategist at Prudential Financial. "But if it's to leave, you have to expect a coordinated effort to calm markets, and you may get that from Janet Yellen tomorrow."
"Statistically, the day of the Fed announcement is an up day for the market. Janet Yellen has a unique ability, when she is hawkish [to speak] with an underpinning of dovishness," Krosby said.
The Federal Open Market Committee is now expected to wind down its two-day meeting with a 2 p.m. ET statement that sheds no light on the timing of its intended interest rate hike. But it is expected to continue to say it will hike rates if the economic data is good enough. The Fed could also note that it is monitoring international developments, particularly since the upcoming U.K. vote on exiting the European Union has been troubling markets.
"After her last speech, I don't know why you'd expect her to sound exceedingly dovish," said Diane Swonk, CEO of DS Economics. Swonk said retail sales data and other data have been improving. "Today's import prices firmed outside of oil. That's what the Fed wanted to see. You've got things moving in the direction the Fed wanted them to move, with an outlier being the employment report. And there's the whole uncertainty around Brexit dampening the market at the moment."
Swonk said the Fed is divided on the impact of Brexit, based on recent comments, but that officials are no doubt already in touch with global central banks in case there is a vote to leave the EU resulting in a negative market reaction.
The Fed will certainly discuss Brexit in its meeting and Fed Chair Janet Yellen will certainly be asked about it at her 2:30 p.m. press briefing. "It's a fine line to walk about not making it too big of a point," Swonk said. "You want to discount it a bit, but if you make too big of a point then you talk up the market jitters."
The discussion in markets has been whether Brexit has serious repercussions for the economy or financial markets, and on the U.S. front, whether the poor jobs report was a one-off event. Some strategists believe there could be a violent initial reaction to a Brexit vote and then a buying opportunity, but others worry that there could be a more serious impact.
Yellen had commented, before the jobs report, that the Fed could hike rates in a couple of months. In a recent speech in Philadelphia after the report, she removed the timing element but remained committed to the idea of a rate hike coming soon.
"The Fed's dealing with the same stuff. It's just the Fed has painted themselves into a corner with data dependency because one piece of outlier [jobs] data does not make a trend," said Swonk.
Economists are watching a number of things in the Fed's statement and forecast, but at the top of the list is the Fed's interest rate forecast — or "dot plot," reflecting the interest rate expectations of Fed officials presented as dots on a chart.
McCarthy said he expects the next rate hike now to be in September, and while the Fed will still forecast two rate hikes this year, some members may cut back expectations to just one. As for next year's forecast, he expects to see three rate hikes forecast instead of four, and four instead of five for 2018.
"It's quite possible by the time we get to the July meeting that the coast is clear. The problem is the coast has got to clear far enough ahead of that meeting that the Fed can send the signal and the market can get the signal that they're likely to raise rates at that time," McCarthy said.
Economists expect the Fed to adjust the outlook on the economy but still sound somewhat optimistic. "But the language on labor will be toned down a bit. [Job turnover data] was good, jobless claims are till near a 40-year low. It'll characterize the job market in somewhat less glowing terms but still show optimism toward it," said Tony Crescenzi, portfolio manager and strategist at Pimco.
Respondents to CNBC's June Fed survey identified the jobs report as the biggest obstacle to a June hike, with global growth concerns second and Brexit the third. Fifty-five percent said the jobs report was a statistical blip, but 35 percent said it was evidence of a new trend of lower job growth. Forty percent said job growth was being depressed because the economy is close to full employment, while 58 percent said they think employers are uncertain about the future.
The Fed could also comment on inflation, as employment costs are showing signs of rising though the Fed's inflation measures are still below target. Yellen's words on that and the economy will be closely watched during her briefing.
"I think one of her objectives [Wednesday] is to be as ambiguous as possible about the timing of the next rate hike. She was masterful about that in Philadelphia. I think the press conference will be a replay of that," McCarthy said.
Jesse Hurwitz, Barclays economist, said Yellen should sound fairly optimistic on the economy, but the Fed will be concerned by the same thing the markets are wondering about. "We need a little more confirmation that the economy is not slowing down, as the jobs report suggested," he said. Hurwitz said recession risks rose to 30 percent after the jobs report, but were at 15 percent before its release.
Job creation also was revised down in March and April. "I think that says risks of a slow down or recession risks are accelerated right now," he said. Economists said the Fed would not need to see strong 200,000 a month payroll growth, and that even 85,000 would be enough to keep unemployment low.
Besides the Fed, traders will be watching PPI producer price inflation data and the Empire state survey, both at 8:30 a.m. Industrial production is released at 8:15 a.m. and Treasury capital flow data is released at 4 p.m.