Unless you choose to save an incoming stream to a file, Wowza will not write to disk. The incoming stream is loaed into the server's allocated memory and it is made available for playback clients. When doing transcoding of an incoming stream, the same scenario is valid. The incoming stream is loaded into the server's allocated memory and transcoded by Wowza Transcoder addon. The output streams generated by the transcoder are available for streaming for any playback clients connecting to those streams.
During this process, Wowza does not write/delete to/from your local harddrive.
The recommended settings for the key frame frequency would be a value between 1 and 4 seconds. This depends very much on the type of content you are streaming. For fast action content (e.g.: sports), a high frequency key frame setting (1 keyframe for each 1 second) would be recommended, while for mostly static content (e.g.: talk show) a lower key frame frequency can be used (1 keyframe for each 2-4 seconds).