Asian shares subdued after Fed hints at rate pause

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SINGAPORE (Reuters) – Asian shares inched higher on Thursday after the Federal Reserve hinted it could pause interest rate hikes following turmoil in the banking sector, though it also reiterated its commitment to fighting sticky inflation.

In a widely expected move, the Fed raised interest rates by 25 basis points but recast its outlook to a more cautious stance as a result of the banking stress.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.27%, while Japan’s Nikkei fell 0.50%. Australia’s S&P/ASX 200 index lost 0.67%.

Wall Street ended sharply lower as investors digested the Fed’s policy statement and comments from Fed Chair Jerome Powell’s press conference. [.N]

China’s blue-chip CSI 300 Index and the Shanghai Composite Index both fell 0.3%, while Hong Kong’s Hang Seng Index was up 0.22%.

The Fed’s statement suggested it was on the verge of pausing interest rate rises, but Powell in his press conference said the central bank would do “enough” to tame inflation and raised the prospect of further increasing rates if it needed to.

Sentiment was also damaged by a comment from U.S. Treasury Secretary Janet Yellen, who told lawmakers that she had not considered or discussed “blanket insurance” for U.S. banking deposits without approval by Congress.

“Despite seeming to rule out rate cuts this year … much of the damage seems to have come from Yellen’s parallel remarks to Congress right when Jerome Powell was insisting that the banking sector was sound,” ING economist Rob Carnell wrote in a note to clients.

“This won’t be the final word on either rates or deposit insurance in all likelihood, and a little further homework and collaboration between Fed and Treasury Dept seems probable.”

Fed funds futures are now priced for a roughly equal chance that the Fed will lift rates by an additional 25 basis points in May or leave them unchanged, according to CME FedWatch tool.

Global markets have been volatile, with bank shares battered in the past two weeks following the sudden failures of two U.S. lenders an emergency sale of embattled Swiss banking behemoth Credit Suisse.

Regulators and policymakers have scrambled globally to quell contagion risks and ease worries of a banking crisis, but investors remain wary that other small lenders may be vulnerable as credit markets tighten.

In the currency market, the dollar index fell 0.137%, with the euro up 0.25% at $1.0882.

The yen strengthened 0.43% to 130.87 per dollar, while sterling was last at $1.2286, up 0.18%.

The yield on 10-year Treasury notes was down 3.2 basis points at 3.468%, while the 30-year Treasury bond was down 1.5 basis points to 3.682%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.1 basis points at 3.970%.

U.S. crude fell 1.11% to $70.11 per barrel and Brent was at $75.94, down 0.98% on the day. [O/R]