The Fed put the markets on notice that it wants to move off of its zero rate policy in December, if the economy is strong enough.
The FOMC, as expected, held off from raising interest rates Wednesday. But in a very clear and unusual message, the Fed's post-meeting statement specifically mentioned the December meeting. The committee said in determining whether it will raise rates at its "next meeting," it will assess the progress toward "its objectives of maximum employment and 2 percent inflation."
While Fed Chair Janet Yellen and other officials have made the same statement, the markets had taken conflicting Fed comments as wishy washy and confusing about both the timing and intentions for a rate hike. The Fed's inclusion of its concerns about international developments in its September statement had flustered markets even more.
"The bond market is getting a wake-up call. The bond market has doubted the Fed for years and years," said John Canally, market strategist and economist at LPL Financial. "They said it but they have never written it. Now they've written it. December is a live meeting."
Stocks immediately fell, with the Dow wiping out a more than 100-point gain and falling into negative territory. But the market rebounded, and the Dow recovered its triple-digit gain. Bond yields rose, with the Fed policy-sensitive two-year yield jumping to 0.70 percent. The 10-year yield rose slightly to 2.08 percent.
John Briggs, head of strategy at RBS, said the Fed will still need the data to cooperate. "They want December to be more live. They're telling the market they want it to think it's still live. They're trying to make the market not take December off the table. It doesn't mean they're going to go in December. They don't want the market to price it out."
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Even if the Fed does want to raise rates, Briggs and others said it's very unclear if it can. On Thursday, third-quarter GDP is expected to show growth of just 1.7 percent, according to the CNBC/Moody's Analytics rapid update.
While the Fed said it would make its decision based on its mandate — inflation and employment — it also said it would base its decision on its "readings on financial and international developments."
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The Federal Open Market Committee also repeated that it would be appropriate to raise the fed funds target rate when it has seen some further improvement in the labor market.
According to fed funds futures, the market immediately pushed up odds of a December rate hike to 47 percent from 34 percent.
An unusually public disagreement between the Fed chair and two governors added to an already confused policy message that had been hurting the central bank's credibility with markets.
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