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Markets higher as Fed chair says interest rates to stay low

Asian markets were mostly higher Friday after the Federal Reserve said it might keep interest rates low even if inflation rises, in a major overhaul of its strategy. Shares retreated in Japan, with the Nikkei 225 index losing 1.1%, to 22,955.69, after major media outlets said Prime Minister Shinzo Abe planned to announce he would step down due to a chronic health problem.

Hong Kong’s Hang Seng climbed 1.1% to 25,554.60. The Kospi in Seoul added 0.6% to 2,358.85. Sydney’s S&P/ASX 200 fell 0.8% to 6,077.30, while the Shanghai Composite index rose 0.6% to 3,370.12. Shares fell in Taiwan and Jakarta but rose in Singapore and Bangkok.

Overnight, the S&P 500 ticked 0.2% higher, moving further into record territory and closing at 3,484.55, after Federal Reserve chair Jerome Powell said in a speech that the U.S. central bank might keep interest rates low to help prop up the pandemic ravaged economy even if inflation rises above its target level of 2%.

The hoped for change in the Fed’s strategy is a huge deal for markets that have been rescued by central banks slashing short-term interest rates and buying all kinds of bonds. The Bank of Japan has kept interest rates near or even below zero for most of the past decade, seeking to spur inflation and entice companies and consumers to spend more.

But Japan, the world's third largest economy, has yet to see inflation hit the 2% target set by its governor, Haruhiko Kuroda, in 2013. On Friday the government reported that the consumer price index rose 0.3% in July, the down from 0.6% the month before.

Stock prices have held steady, though, even as the economy dipped into recession late last year. Abe stepped down from a brief earlier term as prime minister in 2007, also for health reasons. An effective medication to treat his condition, an inflammatory bowel ailment known as ulcerative colitis, reportedly allowed him to regain his footing and win a second term in late 2012. He recently became Japan's longest continuously serving prime minister.

The Japanese Prime Minister’s Office said the reports by national broadcaster NHK and other media could not be immediately confirmed. Abe was believed to be meeting top officials at the Liberal Democratic Party headquarters.

The disruptions dealt by the coronavirus pandemic have pushed the U.S. and many other economies into downturns, causing demand and upward pressure on prices to soften. Low interest rates keep credit cheap to encourage investment and other spending.

“With the adoption of allowing inflation to overshoot their target, the Fed is slowly becoming the BOJ," Edward Moya of Oanda said in a commentary, referring to the Bank of Japan. “The Fed did not give any hints on how they will achieve inflation and that is why no one is buying that it will happen anytime soon."

With its fifth straight day of gains, the S&P 500′s has climbed 56% since late March after the immense support of the Fed helped halt its earlier free-fall and erase its pandemic losses. The yield of the 10-year Treasury was at 0.78% on Friday up from 0.68% late Wednesday. The 30-year yield climbed to 1.50% from 1.41%.

A report Thursday showed the pace of layoffs sweeping the U.S. remains incredibly high but may be slowing. A little more than 1 million American workers applied for unemployment benefits last week, down slightly from just over 1.1 million the week before.

In another report, the government also said that the economy looks like it shrank at an annual rate of 31.7% in the spring quarter. That would be the sharpest quarterly drop on record, but it’s not as bad as the Commerce Department’s earlier estimate of 32.9%.

In other trading Friday, benchmark U.S. crude oil lost 3 cents to $43.01 per barrel in electronic trading on the New York Mercantile Exchange. It fell 35 cents to settle at $43.04 per barrel on Thursday. Brent crude, the international standard, picked up 4 cents to $45.64 per barrel.

In currency dealings, the U.S. dollar bought 106.39 Japanese yen, down from 106.57 yen late Thursday. The euro rose to $1.1868 from $1.1823.

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