It may not be the Fed that signals a more aggressive rate hiking scenario Wednesday — it could be the inflation data.
"CPI, I think, is going to come in pretty good and it will feel pretty warm," said Diane Swonk, CEO of DS Economics. The Consumer Price Index for February is expected to edge up 0.1 percent, with CPI ex food and energy up 0.2 percent when it is reported at 8:30 a.m. ET. That would keep headline consumer inflation at 2.5 percent, well above the Fed's targeted 2 percent pace.
The Fed is expected to hike interest rates by a quarter point Wednesday afternoon, and it is likely to sound more upbeat about the economy. Its dual mandate — inflation and employment — have finally both gained traction with the recent signs of rising inflation. The Fed's preferred inflation measure, the personal consumption expenditures inflation index, still lags CPI but it is moving in the right direction.
Fed officials may feel more confident in raising rates, but they are expected to stop short of increasing their forecast for more than three rate hikes this year, said strategists.
Economists expect three rate hikes for 2017, but there was speculation after February's strong jobs report, with 235,000 nonfarm payrolls, that the Fed could move to four hikes this year. A hotter than expected CPI report could do the same.
"Bond yields could move in the morning if the CPI is hotter than expected like PPI was," said Peter Boockvar, chief market analyst for The Lindsey Group.
The Producer Price Index, reported Tuesday, rose 0.3 percent month over month in February. Year over year PPI was up 2.2 percent, up from 1.6 percent last month.
As for the stock market, "Maybe it bounces after [Fed Chair Janet Yellen] doesn't commit to four hikes," said Boockvar.
The Fed releases its statement on interest rates at 2 p.m., along with its latest forecasts for inflation, interest rates and the economy. The Fed's so-called 'dot plot' is a chart with the anonymous interest rate forecasts of Fed officials, and at some point, some market pros say, inflation could be a driver of rate hikes.
"My guess is you're going to see a higher level of certainty on this multiple rate hike scenario. We're finally at a place where the economy has some self-feeding momentum. It's not just the Fed propping up the us up again. They need to illustrate that," said Swonk.
Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management, said he does not expect four rate hikes this years, and he sees the Fed holding off on June, which most economists see as the next chance for a rate hike. He expects one in September and another in December.
"The whole view for four rate hikes this year rests on how well this health care and tax bill come through into the market. I can only believe from what I see, read and watch that it's going to be messy. I don't think this is smooth and it could be for the next three months that we're going to watch this," said Caron.
Retail sales and the Empire State manufacturing survey are also reported at 8:30 a.m. Business inventories and NAHB homebuilder sentiment are released at 10 a.m.