In This Article:
By Herbert Lash and Huw Jones
NEW YORK/LONDON (Reuters) -Treasury prices rebounded but a gauge of global equities fell on Friday, adding to sharp sell-offs earlier this week, after three Federal Reserve officials warned further rate hikes may be needed to ensure inflation is brought under control.
The officials, in remarks at separate events, said they were uncertain the inflation battle is finished and indicated the U.S. central bank's monetary policy will likely remain tight longer than previously expected.
The Fed on Wednesday raised its forecast next year for the U.S. central bank's overnight lending rate to 5.1%, but lifted its outlook for economic growth. The forecasts seem at odds as higher rates raise credit costs that can slow the economy.
The two projections do not line up because if higher rates are in restrictive territory, as the Fed indicates, that should lead to a slowdown, said Marvin Loh, senior global macro strategist at State Street in Boston.
"Certainly they wanted to send the message that higher is going to be around for longer and they went all-in on the soft landing," Loh said about the Fed's projections released on Wednesday. "There's some inconsistencies associated with that."
MSCI's gauge of global equity performance and stocks on Wall Street fell after early gains. U.S. Treasury yields, which move inversely to price, fell. The benchmark 10-year note slid to 4.30% from 16-year highs of more than 4.5% late Thursday.
The two-year Treasury yield, which reflects interest rate expectations, fell 4 basis points to 5.108%.
In a sign of slowing growth, a flash reading of S&P Global's U.S. Composite PMI index showed U.S. business activity basically at a stand still in September, with the vast services sector essentially idling at the slowest pace since February.
Yields on two- and 10-year notes remained inverted at -67.6 basis points as the shorter-dated note yields more than the longer one. The inversion is seen as a reliable recession harbinger.
"I don't think the Fed's forecasts are consistent with the most likely outcome of how the economy evolves and how things get back to normal," said Joe LaVorgna, chief economist SMBC Nikko Securities America in New York.
"I don't see a soft landing," he said, citing the yield curve's inversion. "The only way out of this is going to be a recession where the Fed has to cut rates."
MSCI's all-world country index for stocks closed down 0.10%, and the pan-European STOXX 600 index fell 0.31%.