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 Investors had expected the Fed to remain pat on rates, but the overt
reference to December came as a surprise.
The central bank also downplayed recent global financial market
turmoil and said the U.S. labor market was still healing despite a
slower pace of job growth.
"In determining whether it will be appropriate to raise the target
range at its next meeting, the committee will assess progress - both
realized and expected - toward its objectives of maximum employment
and 2 percent inflation," the Fed said in a statement after its
latest two-day policy meeting.
Investors quickly placed bets reflecting a higher chance the U.S.
central bank will raise rates in December, with futures contracts
implying a 43 percent possibility compared to 34 percent prior to
the statement.
"The Fed is seriously considering a December rate hike," said Harm
Bandholz, an economist at UniCredit in New York.
Going into the Fed meeting this week, the market had viewed March as
the most likely time for the central bank to begin its rates
"liftoff," but it now sees a greater chance of that happening in
late January.
The U.S. dollar rose sharply and yields for U.S. government debt
soared in anticipation of higher rates. U.S. stock prices initially
fell but regained momentum and closed sharply higher.
Michael Feroli, a former Fed economist now at JPMorgan, said the Fed
statement was the first since 1999 in which policymakers pointed to
a possible rate increase at the next meeting.
"By specifically referring to that meeting they are basically
testing the waters a bit," said Aneta Markowska, an economist at
Societe Generale in New York. She described it as a "subtle attempt"
to gently nudge the market in that direction.
LEAVING DOOR OPEN
The Fed has been struggling to convince investors a rate hike was
imminent in the wake of data this month that showed U.S. employers
slammed the brakes on hiring in August and September.
But it countered the skepticism on Wednesday by saying even slower
hiring was still enough to get it closer to its goal of maximum
employment.
Central bank policymakers also pointed to "solid rates" of growth in
consumer spending and business investment, while eliminating a
reference from their previous statement warning a global economic
slowdown could sap U.S. economic strength.
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Fed Chair Janet Yellen has been saying for much of this year that a
rate hike would likely be needed in 2015 to keep the economy from
eventually overheating.
More recently two Fed governors urged caution over rate hikes while
questioning Yellen's views on inflation, though such doubts appeared
muted in Wednesday's statement.
The Fed now has several important economic readings to parse,
including two monthly employment reports, before it makes up its
mind on whether to tighten policy at its Dec. 15-16 meeting.
It will also get a chance to see how monetary policy easing in
Europe, Japan and China plays out in financial markets. Easy money
policies abroad push the dollar higher, hurting U.S. exporters and
making it harder for the Fed to get inflation back up to its 2
percent target. That may explain why the Fed sought to leave the
door open for a rate hike rather than paint the economy as fully
ready for a monetary policy tightening.
"The Fed has dialed down its anxiety over international
developments, but it's best to play it safe," said Brian Jacobsen, a
portfolio strategist at Wells Fargo Funds Management in Menomonee
Falls, Wisconsin.
(Reporting by Lindsay Dunsmuir and Jason Lange; Editing by Paul
Simao)
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