US dollar, stocks up as Fed hints at Dec rate hike
THE United States Federal Reserve kept interest rates unchanged on Wednesday and, in a direct reference to its next policy meeting, put a December rate hike firmly in play.
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 US labour 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 realised and expected - towards its objectives of maximum employment and 2 per cent inflation," the Fed said in a statement after its latest two-day policy meeting.
Investors quickly placed bets reflecting a higher chance the US central bank will raise rates in December, with futures contracts implying a 43 per cent possibility compared with 34 per cent 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 "lift-off", but it now sees a greater chance of that happening in late January.
The US dollar rose sharply and yields for US government debt soared in anticipation of higher rates. US 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.
The Fed has been struggling to convince investors a rate hike was imminent in the wake of data this month that showed US employers slammed the brakes on hiring in August and last month.
But it countered the scepticism 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 US economic strength.
Fed Chair Janet Yellen has been saying for much of this year that a rate hike would likely be needed this year to keep the economy from eventually overheating.
More recently, two Fed governors urged caution over rate hikes while questioning Dr Yellen's views on inflation, though such doubts appeared muted in Wednesday's statement.