Federal Reserve Chair Janet Yellen testifies on the U.S. economic outlook, before the Congressional Joint Economic Committee on Capitol Hill, in Washington, D.C., November 29, 2017.

The Federal Reserve may sound a bit more hawkish as Fed Chair Janet Yellen's tenure comes to an end.

Yellen was presiding over her final meeting, and the Fed's post-meeting statement will be released at 2 p.m. Wednesday afternoon.

"They're not going to raise rates this time around. They do want to at least confirm the market's expectations for a March rate hike," said Tom Simons, chief money market economist at Jefferies.

Yellen leaves the Federal Reserve after four years as chair, and in that time she began the slow process toward normalizing interest rates and shrinking the Fed's balance sheet. Viewed through most of her tenure as a dove, Yellen began the process of reversing extreme crisis-level policy. She had previously served as vice chair to her predecessor, Ben Bernanke, and was president of the San Francisco Fed prior to that.

The Fed is not expected to take any rate action at the two-day meeting, and the market has been primed for a March hike, as well as two others later in the year. That fits with the Fed's forecast for three interest rate increases this year. But that could change under the incoming chair, Jerome Powell, when forecasts and projections are released after the March meeting. Powell has been a Federal Reserve governor.

Economists expect few changes in the FOMC statement, but the changes Fed officials could make might be significant for market expectations.

"I think if they were to put anything that was perceived as dovish into the statement they would be reducing that [March rate hike] probability. It's going to be a more bullish commentary about the economy and maybe include something on rising inflation expectations," said Simons.

To really sound hawkish, the Fed may need more proof.

"I think they have to acknowledge strength of economy which has risks of more inflation than expected. They need more data to be explicitly hawkish," according to Diane Swonk, chief economist at Grant Thornton. Swonk, in an email, said the Fed should increasingly sound hawkish at upcoming meetings.

J.P. Morgan economists expect the Fed to describe the economy in an upbeat way and remove language from the statement that talked about post-hurricane disruptions. There is a risk that the Fed could add a hawkish addition to the statement by adding that "easy financial conditions" are supporting the growth picture. However, on inflation, they think it's less likely the Fed will make a change.

"The safe course would be to repeat the last statement that headline and core inflation on a 12-month basis declined earlier this year and remain below 2 percent. A less likely hawkish risk scenario is to note that inflation has picked up some in recent months, but continues to run below 2 percent," wrote J.P. Morgan chief U.S. economist Michael Feroli.

The bond market has already been signaling it expects the Fed to sound more hawkish, and it is also reacting to the potential for other central banks to get more aggressive. Simons said the signs of inflation are building even though the Fed's preferred inflation measure, the PCE deflator, shows just a 1.5 percent annual rate.

"Commodities prices are rising," said Simons. He said Treasury Inflation Protection Securities also show inflation expectations at a four-year high. The prices in manufacturing and services sector data are high. "I think there are signs of inflation rising."

Treasurys have been selling off this week, but buyers stepped in Wednesday. One catalyst for the sell off were comments from Dutch central bank president Klaas Knot, who said the European Central Bank should end its asset-buying program, which it just recently cut in half. U.S. yields jumped with German bunds, and the 10-year Treasury yield temporarily reached a four-year high of 2.73 percent. There was also market chatter that the Fed could move more quickly than expected, based on potential inflation.

"Yellen leaves on a high note by making this meeting, as the Fed is further shrinking its balance sheet, with little to no ripple in financial markets," notes Swonk. "She has navigated the crisis to the beginning of the end of crisis era policies. That is an extraordinary accomplishment given her short tenure."

Powell, who is seen as supporting policy similar to Yellen's, is expected to continue the slow normalization process. "The message of the Fed will be a steady easing up on the accelerator," said Swonk.



