Investors are raising the odds of a more dovish December rate hike of 50 basis points as the Fed says it will consider 'cumulative tightening' efforts

• Investors on Wednesday were pricing a rate hike of 50 basis points at the Fed's December meeting, which would be slower than its recent run of increases.
• The CME FedWatch tool showed a 59.4% probability of a half-point increase next month, up from 44.5% a day earlier.

Investors on Wednesday were pricing in a step-down in the size of the Federal Reserve's interest-rate increase in December, foreseeing a hike of 50 basis points as they latched onto new language included in the central bank's latest policy announcement.

After the Federal Open Market Committee lifted rates by 75 basis points for a fourth consecutive time, the CME FedWatch tool showed a 59.4% probability of a half-point increase at the December 13-14 meeting. That's higher than 44.5% a day earlier.

At the same time, the odds of another rate increase of 75 basis points fell to 34.8% from 49.7% a day ago.

The moves were set off after the Fed included in its November policy statement a new sentence that investors saw as an indication policymakers were preparing to issue smaller rate hikes.

"In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," the FOMC wrote.

But at a subsequent press conference, Fed Chairman Jerome Powell said it was "very premature" for the central bank to start thinking about pausing rate hikes and noted that the terminal rate may be higher than what the Fed anticipated earlier.

Stocks were volatile Wednesday as investors weighed Powell's remarks against the Fed statement. The S&P 500 initially swung higher then sank by 2%. The Dow Jones Industrial Average soared about 330 points then reversed lower, losing more than 300 points.

The 10-year Treasury yield fell to a session low after the Fed decision, slipping as much as 9 basis points to 3.97%, before returning above 4%.

The latest rate increase comes as the Fed battles inflation that's jumped to a four-decade high. The Consumer Price Index rose 8.2% in the year through September, while core prices accelerated to 6.6% — the highest rate since 1982.