The Fed is expected to leave rates on hold today (two-thirds chance of no rate change)...

However, the key is whether they nod to recent economic weakening or stick to a positive message.

Wall Street will be looking for any nod to firmer inflation for potential hints of more rapid rate rises. If the FOMC statement cites the price pickup and continued moderate economic growth, it is likely to reinforce expectations of a rate hike in June. Investors anticipate two or three more moves this year.

“How they choose to alter the characterization of inflation is important,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “They have been saying for a long time it’s running below target. There are shades of gray” in their portrayal.

Bloomberg economists - Carl Riccadonna and Niraj Shah - expect the official communique from the May FOMC meeting, Jerome Powell’s second as Fed Chairman, will incorporate only minor changes to the assessment of economic conditions. Most notable will be the characterization of recent inflation news -- sustained 2 percent inflation finally appears to be within reach. There is little need for officials to more clearly communicate a June rate increase, as it is already priced into the fed funds futures market with a likelihood of over 90 percent.

We do note that there is an interesting relationship beginning to take hold between The Fed's normalization of its balance sheet and the rise in longer-end yields...

A $100 billion reduction in the balance sheet has coincided with a 100bps rise in 10Y rates. Will they stay on this tack?

“I just expect a ‘stay the course’ statement with just a few changes aimed mostly at marking to market the outlook,” said Roberto Perli, partner at Cornerstone Macro LLC in Washington. “The June meeting should be more interesting. This week will probably just be about buying time.”

But what's priced in? Rafiki Capital Management's Steven Englander explains, the bottom line: a hawkish turn on inflation language is already priced in, and the FOMC probably does not want to lock in on four hikes this early in the year.

The FOMC will sound hawkish on baseline and dovish on risks. The hawkish baseline is that the language on inflation needs a makeover. The dovish part is that there is likely to be some explicit reference to downside risks – otherwise there is nothing to balance the inflation language change.

With trepidation, I am going to make the case that the market already prices in hawkish Fed language and intentions as a baseline.

Unless the Fed signals ‘Inflation Code Red’ (unlikely at a no-presser and in the absence of preparation), there is likely to be enough risk language to convey that there are reasonable circumstances when they would not hike.  Hence, I see upside for equities and...