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Fed's Powell says could raise rates beyond December, gives nod to disinflation

FILE PHOTO: An eagle tops the U.S. Federal Reserve building's facade in Washington

NEW YORK (Reuters) - Federal Reserve Chairman Jerome Powell said on Wednesday he is not fully sure where the central bank will stop with rate rises as it presses forward with its efforts to cool inflation.

"There is more work to do" and the Fed has not decided where it will stop rate rises, with the possibility the Fed will go above the 5.1% federal funds rate it penciled in as a terminal rate in its December forecasts, he said in a press conference following the Federal Open Market Committee meeting.

But Powell did give a nod to disinflation, which he said is in its early stages.

The Federal Reserve raised its target interest rate by a quarter of a percentage point on Wednesday, yet continued to promise "ongoing increases" in borrowing costs as part of its still unresolved battle against inflation.

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MARKET REACTION:

STOCKS: U.S. stocks turned higher in the wake of Powell's remarks.

BONDS: U.S. Treasury yields extended their fall.FOREX: The U.S. dollar extended losses following Fed's Powell's remarks.

COMMENTS:

ANGELO KOURKAFAS, INVESTMENT STRATEGIST, EDWARD JONES, ST LOUIS

"Powell wasn't as hawkish as feared. We've seen for around three-and-a-half months a significant easing in financial conditions, with equity markets rising, bond yields falling, the dollar falling, mortgage borrowing costs dropping from the highs...there was a question about that on the press conference."

"Powell could have used that as an opportunity to recalibrate expectations. He didn't take that opportunity."

"Clearly Powell has said the job isn't done yet but that progress has been made in disinflation. The fact he acknowledged that provided some comfort together with him not pushing back hard on the question about easing of financial conditions."

"Market participants thought he would push back against market expectations we're going to have immediate pause or rate cuts. The fact he didn't narrow down or focus on short term easing conditions was the point where the market turned positive."

"He had an opportunity to relay a hawkish message and didn't take it. He could've said that markets are getting overly excited and he didn't take the opportunity. Instead he said a lot of tightening has already happened."

"He cannot declare victory yet and we have a lot of data points between now and March. So because investors have seen disinflation which he acknowledged they see the statement about ongoing increases as a placeholder."

EDWARD MOYA, SENIOR MARKET ANALYST, OANDA, NEW YORK

"It's like he's trying to be two people, he's trying to be Dr Jekyll and Mr Hyde and he's saying yes we could hike more, obviously more rate hikes are coming according to the statement, but then he just wanted to talk about the disinflation process, he kept highlighting the progress…The markets are pretty much intent that he sees inflation coming down and it seems like he's pretty confident that its going to continue…Right now it looks like they've made up their mind, they're going to be data-dependent, they have two more inflation reports going into the March meeting and if we see pricing pressures continue to ease then they might fall short of their dot plots and only have to deliver one more rate hike. This is good news for risky assets, good news for the euro and it's taking the dollar to some of the lowest levels we've seen in several months."

"We're still looking at a strong labor market, you're having disinflation trends remain in place, and we're just starting to feel the impact of all those rate hikes, so I think the Fed is getting comfortable with what they've done as far as taking rates to these levels."

"The markets are pretty confident that this could be the last one…they're going to anticipate that they're at the end and if they raise one more time that should be restrictive enough, and as long as we don't see inflation hit a wall at 4% and can't break below it, Fed expectations will remain in place that they will be cutting by the end of the year."

CHRIS, ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NORTH CAROLINA

"The market is rallying despite what the Chairman said and not because of what he said. He's been very clear that they are going to raise rates at least two more times (unlike one more time, which was consensus) and that their job is not done and that they would rather overdo raising rates than underdo it. The Fed is failing to convince the market that they have the fortitude to stick with restrictive monetary policy until inflation has been reduced to 2%. The market is testing the Fed’s resolve and is going to rally until it is proven wrong."

"Personally, we wouldn't fight the Fed, but clearly more people are willing to do so than you would expect (judging by how much the market has rallied this year and is rallying today).

MATTHEW WELLER, GLOBAL HEAD OF RESEARCH, FOREX.COM AND CITY INDEX, UTAH

"Powell confirmed his expectation that the central bank will raise interest rates (at least) two more times, but his acknowledgement that 'the disinflationary process has begun' has given traders more confidence that those will be the last two hikes of this cycle and that the Fed will be on hold midway through Q2. Meanwhile, his repeated focus on 'core services ex-housing' provides a clear inflation metric for traders to watch to evaluate whether what the central bank will do in the coming months."

MICHELE RANERI, VICE PRESIDENT AND HEAD OF U.S. RESEARCH AND CONSULTING, TRANSUNION, CHICAGO

"This second consecutive lower hike serves as evidence that the Federal Reserve is signaling that significant progress has been made in tamping down inflation and that we have reached a point where rate hikes can be further scaled back. Consumers will likely continue to feel the double-edged effects of both continued inflation and high interest rates for at least a while longer and may seek to shed high interest-debt via personal loans or other lower-interest loan products."

ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L.PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS

"The key thing the Fed is focused on is wages and we are seeing wage inflation continue to ameliorate if you look at both average hourly earnings and the employment cost index which just came out, wages are beginning to soften, but they are not softening enough to get inflation down to that 2% target. They are specifically looking at the non-housing services portion of the PCE and as long as wages are still growing at 5-ish% you are not going to see the Fed back off."

"One thing that struck me about the statement is that they had a very slightly dovish change in the language where they previously had talked about determining the pace of future increases and now they are talking about determining the extent of future increases. So they did 25, the market is pricing in two more 25s, that is probably right but the question is going to be what is the terminal rate, when do they stop and when do they start to cut again. But what they have said here is this is a little more dovish than it might have been because they are not talking about the pace anymore."

"This basically takes 50 off the table, not that it was necessarily on, but the language last time could have defended 50 and now that is off the table. They have to see those wages come down."

RYAN DETRICK, CHIEF MARKET STRATEGIST, CARSON GROUP, OMAHA

"The Fed threw no curve balls, as they did what was widely expected. The door is cracking open to end rate hikes, but they still have a chance for one more rate hike at the next meeting."

"The economy is still growing, which is comforting as (the Fed is) not worried of an impending recession."

"Investors should be happy that we likely have a Fed that is going to end hikes fairly soon as the inflation data continues to show major improvements, which is exactly what the Fed needs to take their foot off the pedal."

"Yesterday's Employment Cost Index was an improvement, and Powell said he needed to see employment costs improve before he stops hiking rates. How close are we now with ending the rate hike cycle, when it’s clear employment costs are slowing?"

(Compiled by the Global Finance & Markets Breaking News Team)