By Lindsay Dunsmuir and Jason Lange

WASHINGTON (Reuters) – The U.S. 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 U.S. 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 realized and expected – towards its objectives of maximum employment and 2 percent inflation,” the Fed said in a statement after its latest two-day policy meeting.

Investors quickly shifted their expectations of a December hike, with rates futures contracts upping the chance of a move this year to 43 percent from 34 percent prior to the statement.

“It’s a subtle attempt to gently nudge the market in that direction, but not doing it so strongly that it would start to tighten broader financial conditions,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York.

“By specifically referring to that meeting they are basically testing the waters a bit, without unnerving the market,” Markowska said.

The U.S. dollar rose sharply and yields for U.S. government debt soared in anticipation of tighter policy after the Fed statement. U.S. stock prices pared earlier gains before regaining momentum later in the session.

In addition to noting the slower pace of U.S. job growth and a steady unemployment rate, the Fed’s policy-setting committee repeated its view that underutilisation of labour resources had diminished.

“The committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced,” the Fed said. It added that the U.S. economy has been expanding at a moderate pace.

BREAKING RANKS

Most Fed policymakers have said they expect to raise rates in 2015, but two broke ranks with Fed Chair Janet Yellen this month, questioning her view that labour market tightness will fuel inflation and overheat the economy.

They urged caution rather than a rate increase, arguing that a weakening global economy could sap U.S. economic growth and keep inflation too low.

The Fed has struggled to convince sceptical investors that a rate hike is imminent. Before Wednesday’s meeting, financial markets saw virtually no chance it would raise rates this week. A narrow majority of economists polled earlier this month by Reuters predicted a rate increase in December.

The main stumbling block is that U.S. economic growth has been generally tepid and inflation low even though unemployment has fallen.

Compounding the situation, central banks from the euro zone to China are easing monetary policy, keeping upward pressure on the U.S. dollar. That hurts American exporters and acts as a brake on inflation.

In its statement, the Fed repeated it wants to be “reasonably confident” that low inflation will rise to its 2 percent target.

The Fed has two months of data to parse, including Thursday’s third-quarter GDP estimate as well as employment reports for October and November, before deciding if the economy is strong enough to withstand its first rate hike since 2006.

It will also get a chance to see how monetary policy easing in Europe, Japan and China plays out in financial markets. When the European Central Bank hinted last week at more bond-buying stimulus to come, the dollar rose 3 percent.

Richmond Fed President Jeffrey Lacker dissented on Wednesday for the second consecutive meeting.

(Reporting by Lindsay Dunsmuir and Jason Lange; Editing by Paul Simao)