Fed Message Will Be Dovish Despite Ruffled Feathers

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At the end of the day, the doves rule the roost at the Fed, but expect to hear more hawkishness from behind the scenes in Wednesday's release of the Fed meeting minutes.

There's an especially high level of interest in the minutes from January's Federal Open Market Committee meeting, after the December minutes rocked the markets. Those minutes, released January 2, noted that several FOMC members wanted to see quantitative easing stopped or slowed by the end of this year, earlier than expected. Even though unlikely, that comment helped drive up interest rates, and the 10-year note has held at a slightly higher level around 2 percent since then.

(Read More: Oil Rally Could Fade If Fed Hints at Policy Pause)

"The minutes should be interesting," said Ward McCarthy, chief financial economist at Jefferies. "There's clearly contention, and this will give us a little insight into that. I think they come out similar to December – a little confused; a little contentious; yes dovish, but not indefinitely."

Under its quantitative easing program, the Fed is purchasing $85 billion in Treasurys and mortgage securities each month, in an effort to drive rates lower and keep mortgage rates low. The Fed said "almost all" members at that December meeting thought the asset purchase program that started in September was effective and supports growth, but they were concerned about the benefits versus the costs of ongoing purchases.

(Read More: Mortgage Applications Slumped as Rates Rose)

"We might hear the same hawkishness, but we won't care because it was in the December minutes," said Ian Lyngen, senior Treasury strategist at CRT Capital. "We won't get the same response. It's not that they won't be making headlines. We have a new dissenter. It's the first time (Kansas City Fed President) Esther George dissented and her objections might be seen in greater detail."

The Fed also reported that "various members" in December said they thought a continuing assessment of the labor market and reviews of the effectiveness of QE and its costs were important.

"This could be a moment to explain what they meant instead of reinforcing that they want to stop," said George Goncalves, Treasury strategist at Nomura Americas.

(Read More: Fed's Pianalto Expects US Outlook to Improve)

"They probably got a little bit nervous given the reaction the bond market had in January. They also worried if they keep giving signals they want to stop QE at some point in the future and that elicits a selloff in bonds that probably hurts the recovery and is counterproductive. I think the doves probably get the message across," he said. Goncalves said further rate increases could pressure mortgage rates, and hurt the housing recovery.

Several FOMC members joined or exited voting posts between the December and January meeting, but analysts' don't see a change of balance on the board. The dovish position is firmly anchored by Chairman Ben Bernanke, Vice Chair Janet Yellen and New York Fed President William Dudley.

"I don't think the composition between hawks and doves shifted that much, and I think the doves win. The hawks have had their day in the sun," said Goncalves.

Besides the Fed minutes at 2 p.m. ET, there is also the Producer Price Index and housing starts, both at 8:30 a.m. ET.

St. Louis Fed President James Bullard, a hawkish voting member, speaks at 12:30 p.m. ET Thursday on monetary policy and the economy at New York University, and San Francisco Fed President John Williams also speaks Thursday at 1 p.m. to the New York Forecasters Club. Williams is in the dovish camp and is not a voting member. They do not speak Wednesday, as originally reported.

Bullard has said he believes the Fed could be reducing its purchases because of improved data and could also reduce purchases gradually as unemployment improves.

(Read More: Weekly Claims Slide as Jobs Picture Strengthens)

McCarthy expects to see the Fed discuss the wind down of QE as unemployment falls but not yet. "I wouldn't be surprised by the end of the year that there will be active discussions about a wind down," he said.

Markets traded quietly Tuesday, and stocks continued their slow climb toward all-time highs. The 10-year note was yielding 2.03 percent at the end of the day Tuesday.

With Fed asset purchases helping risk markets, stocks have gained more than 7 percent since the beginning of the year.

The Dow Tuesday was up 53, at 14,035, a new five-year high and the S&P 500 was up 11, at 1530. The Nasdaq broke above 3200 to 3213 for the first time in 12 years. Maxim Group technician Paul LaRosa said a close above that level would be confirmation by the Nasdaq of the move in other indexes, meaning the market could continue higher.

While stocks gained, the VIX, the CBOE's volatility index, fell 1.2 percent to 12.31, near its lowest level since June, 2007.

"This is an amazing turn of events—the fact there's no volatility in all markets, but really especially in the rates market," Goncalves said. "There's no rotation into equities, just the extra money that was lying around out there is going into equities. It's not at the expense of bonds. How can you get a great rotation when the Fed is supporting the bond market?"

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The stock market, meanwhile, shows signs of being overbought, but it still made a strong showing Tuesday. Art Cashin, director of floor trading at UBS, said the Dow and S&P both made strides in that they closed above a recent range, capped by Dow 14,000 and 1525 on the S&P. The Dow is just 128 points from its all-time high, and the S&P 500 is 34 points away. The Russell 2000 was up nearly a percent at 912, a new record.

"It's good the small caps are playing well in here. It is historically a good sign," said Cashin. "That having been said you a lot of stocks above their 10- and 20-day moving averages. So, they're kind of overbought."

There are a few earnings Wednesday including Toll Brothers, Devon Energy, Eaton Vance, DTE Energy, BHP Billiton, Sodastream, Garmin, Owens Corning and MGM Resorts, before the open. Boston Beer, Cheesecake Factory, Crox, Tesla Motors, Sunoco Logistics, Fluor, CMS Energy, and Synopsys report after the close.