By Samuel Indyk and Koh Gui Qing
NEW YORK/LONDON (Reuters) -World stocks eked out gains on Friday as investors, shrugging off bets for a more dovish tone, took comfort from a balanced message from the Federal Reserve that the inflation fight is not over, but it will proceed "carefully" in its next move.
In remarks delivered at the central bank conference in Jackson Hole, Wyoming, Fed Chair Jerome Powell said inflation was still too high even with recent favourable readings, and that the U.S. central bank has substantial ground to cover to regain price stability.
But at the same time, Powell noted that economic uncertainty called for "agile" monetary policy making, and that the Fed will proceed "carefully" when deciding its next policy move.
"There was a little something for everybody. If you're a bear, you heard him say we're going to be restrictive, and we might hike rates," said David Sadkin, president at Bel Air Investment Advisors.
"If you're a bull, you heard him say, we're making progress against inflation and we still expect there to be a lag in from the effects of monetary policy, and we could be on hold."
The remarks led U.S. stocks to gyrate between modest gains and losses before jumping higher towards the end of the session. The Dow Jones gained 0.73%, the S&P 500 rose 0.67% and the Nasdaq Composite gained 0.94%. [.N]
Gains on Wall Street lifted global stocks, and the MSCI All Country stock index edged 0.12% higher.
U.S. bond investors nonetheless dialled back their bets of a rate hike in November and December following Powell's remarks, though Treasury yields traded near break-even by late morning.
The yield on 10-year Treasury notes was steady at 4.2314% and the two-year yield, which reflects interest rate expectations, rose to 5.0735%. [US/]
European shares also gave up earlier gains to end flat, and the euro at one point fell to its lowest since mid-June on expectations that the European Central Bank could pause its tightening cycle next month. The euro pared its losses by the end of the day to be down 0.12% at $1.07965.
ECB policymakers are increasingly concerned about deteriorating growth prospects and momentum for a pause in its rate hikes is building, Reuters reported, citing sources with direct knowledge of the discussion.
Markets are split almost evenly on whether the ECB will hike at its meeting next month, compared with around a 60% chance of a hike before weak activity data was published earlier this week.
"We've seen a back-off in ECB rate hike expectations. The trillion dollar question is how much validation and support that gets from (ECB President Christine) Lagarde today," said Ben Laidler, global markets strategist at eToro.
Powell's message on Friday lined up with the mixed signalsby other Fed officials in the final run-up to the conference.
Philadelphia Fed President Patrick Harker told CNBC he doubted the central bank would need to raise rates again, but also indicated he was not ready to predict when rate cuts might begin. Boston Fed President Susan Collins said on Yahoo Finance's video channel that rates may be near or at a peak, "but certainly additional increments are possible."
Asian shares also had a lacklustre performance overnight. MSCI's broadest index of Asia-Pacific shares sagged 1.2%.
The U.S. dollar index - which measures the currency against a basket of six developed-market peers, including the euro - also gave up earlier gains to stand unchanged, after jumping as much as 0.35% to 104.44, a level last seen in early June.
"USD gains have moderated through European trade and the USD has lost minor ground against some high beta currencies as equity markets have strengthened over the session," said Shaun Osborne, chief FX strategist at Scotiabank.
Against Japan's currency, the dollar edged tentatively back toward last week's nine-month high of 146.595.
Tokyo consumer price data on Friday, which front-runs nationwide figures, showed inflation remained well above the Bank of Japan's target. However, the lag in pay increases may be more pivotal for steering policy.
"We do not expect the Bank of Japan to tighten monetary policy because the spike in inflation has not spilled over to a large acceleration in wage growth," CBA strategist Joseph Capurso wrote in a client note.
BOJ Governor Kazuo Ueda is scheduled to speak at Jackson Hole on Saturday.
In energy markets, crude prices rose on Friday but remained on track for weekly declines. Brent crude rose $1.42, or 1.7%, to $84.78 a barrel, while U.S. West Texas Intermediate crude was up $1.02, or 1.29%, at $80.07 a barrel. [O/R]