At the conclusion of its Federal Open Market Committee (FOMC) meeting on Wednesday, the Federal Reserve surprised no one when it announced no change in interest rates, which are currently near 0%.
Given persistently low readings on inflation, deceleration in the global economy, and elevated volatility in the financial markets, most economists didn't see the Fed tightening monetary policy with interest rate hikes until early 2016 at the earliest.
However, the Fed tweaked its communication about the direction of monetary policy via a simple four-word phrase: "at its next meeting."
"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 the third paragraph of its statement.
Now, the surprise is not so much the nature of the guidance. Rather, it's the fact that they didn't clearly rule out the next meeting - which occurs December 16-17 - as the time when it would raise rates, ending the era of zero interest rate policy.
"By being so specific, monetary policymakers are attempting to force market participants to price the very real possibility of a rate hike in December should economic and financial conditions warrant," Deutsche Bank's Joe LaVorgna said.
Initially, stocks tumbled and the dollar surged, something that has been known to happen when traders interpret the Fed's message as hawkish, or having a slant towards more restrictive and tigher monetary policy.
"My takeaway, is that they want to be done with zero, but can't bring themselves to do it," Brean Capital's Peter Tchir said. "It was definitely more hawkish than last month's report, and the market maybe got ahead of itself in terms of how dovish it would be, which is why we are seeing this initial reaction."
December is on table
"HAWKISH," said Renaissance Macro's Neal Dutta, who specifically pointed to this phrase. "This changes the tone of the third paragraph in two ways. First, the Fed is talking about raising rates as opposed to maintaining the current range. Second, by inserting the words "at its next meeting" it makes December more likely."
"Keeping the prospect of a December rate hike alive was the fact that they shifted the language regarding policy to a more active phrase," UBS's Drew Matus noted. "The statement read: "In determining whether it will be appropriate to raise the target range at its next meeting" from "In determining how long to maintain this target range…"
Currently, the futures market has assigned an implied 43% likelihood of a rate hike in December, which is up significantly from the 30% level before the Fed's FOMC meeting this week.
"So, with the risk of a destabilising debt ceiling stand-off apparently averted, everything will come down to the incoming data between now and mid-December," Capital Economics' Paul Ashworth said. "Fed Chair Janet Yellen is also scheduled to talk to the Washington Economists' Club on 2nd December and to testify to the Joint Economic Committee of Congress the next day. These will obviously be key appearances ahead of that December FOMC meeting."
Some economists are certainly feeling more emboldened by their December rate hike calls.
"In short, then, the December hike now hinges on the next two employment reports," Pantheon Macroeconomics' Ian Shepherdson said. "Some combination of payrolls, unemployment and wages signalling continued improvement will be enough; we're leaving December as our base case, though it is by no means a done deal."
The Fed dropped its target benchmark interest rate to a range of 0% to 0.25% in December 2008 in its effort to stimulate growth and inflation in the wake of the global financial crisis. The last time the Fed hiked rates in any context was June 2006.