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This is the real reason the Fed might hike rates

Federal Reserve watchers will be parsing every piece of economic data between now and mid-December to figure out whether the central bank will raise interest rates before year's end.

What may well be the most important factor, though, is tilting in favor of a hike.

Fed fund futures, in which traders place their bets on where rates will be after each Federal Open Market Committee meeting, now indicate the probability of a December move at 58 percent. That's a jump of 4 percentage points on a daily basis and a huge surge from a month ago, when traders anticipated just a 2 percent chance of a hike amid market turmoil and indications of deflation in the U.S. and global economies.

Of course, day-to-day trading on anything is volatile, and that's no less true when the market is trying to read tea leaves for a group that has been as fickle as this Fed board.

But the shift is significant in that the Fed increasingly has changed its focus from being "data dependent," as it claims in public statements, to market dependent, which provides a clearer explanation for the Fed's rate indecision through 2015.

A trader works on the floor of the New York Stock Exchange.
Getty Images
A trader works on the floor of the New York Stock Exchange.

The data, after all, have been fairly consistent through the year — regular drops in unemployment, gross domestic product growth in the 2 to 2.5 percent range and solid though unspectacular gains in most of the other metrics the Fed follows.

What has not been consistent, however, has been market behavior.

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Stocks have been choppy through most of the year and took a beating in August and September. However, October saw a huge rebound, and the S&P 500 is now nearly 13 percent off its 52-week low in late-August.

Lo and behold, a rate increase is back on the table.

Some on Wall Street, though, are not happy that Chair Janet Yellen and her fellow Fed officials seem to have abandoned their adherence to data points like unemployment and inflation and seem interested primarily in not upsetting financial markets.

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"The fluidity with which the Yellen FOMC adopts and discards reasons for changing its monetary policy stance has heightened market uncertainty, and diminished the Fed's credibility," Citigroup economist William Lee said in a recent note. "Even more disturbing is the apparent readiness of the Yellen FOMC to react to short-term financial market developments, despite statements to the contrary."

Yellen gave her most convincing pronouncement yet Wednesday, confirming in congressional testimony that December is definitely on the table for a rate hike. Short-term interest rates jumped on the remarks as did the dollar against the euro, while major stock indexes headed lower.

Read MoreDecember rate hike a 'live possibility'

Lee, though, said it's probably better simply to watch the markets than it is to place faith in Fed officials' pronouncements.

"For the post-September Yellen FOMC, it is difficult to evaluate whether any policy statement is hawkish or dovish without projecting the expected state of financial markets at the time of the next meeting," he said. "It is difficult to avoid asking whether the 'hawkish' tone in the October statement, established by referring to (macro) circumstances at the time of the December meeting, was designed to raise the odds of a rate increase in December."

Whatever the intention, markets are reading the Fed as leaning toward a rate hike. In addition to the moves in government bond yields, stocks and the dollar, fund futures rose 2 points during Yellen's congressional testimony.