(Adds oil, gold settlement prices, comment)
By Herbert Lash and Alun John
NEW YORK/LONDON, Feb 8 (Reuters) - Global shares fell and the dollar was steady on Wednesday as the Federal Reserve's mantra that interest rates will stay higher for longer overshadowed the notion that the U.S. central bank will soon pause its tightening cycle as the economy slows.
Fed Chairman Jerome Powell provided fuel for both sides of the argument at the Economic Club of Washington on Tuesday, saying rates might need to move higher if the U.S. economy remained strong, but he reiterated "disinflation" is underway.
Fed officials on Wednesday echoed that dual message, with Governor Christopher Waller saying the battle to reach the Fed's 2% inflation target "might be a long fight."
But Governor Lisa Cook said the big job gains in January with moderating wage growth increased hopes of a "soft landing."
"The markets are confused and investors are confused," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. "The stock and bond markets are seeing different things. Some investors are still very defensive and some investors clearly have become more aggressive."
MSCI's U.S.-centric index of stock performance in 47 countries shed 0.59% as declining corporate results from a year earlier weighed on Wall Street. The dollar index rose 0.145% and Treasury yields edged lower.
Financial markets are being driven by excessive liquidity at a time when both bond and equity markets are expensive, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC in New York.
"As people come to the realization that the Fed is going to be higher for longer and we don't yet know what the higher is," he said. "Even if they pause, I still think the next move is a rate hike, not a rate cut."
The market is in see-saw mode as it awaits the Fed's next move, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. Expectations are for the Fed to hike rates by 25 basis points two more times and then pause.
"I wouldn't be surprised if they hike three more times because of the really strong jobs market," Tuz said.
The Dow Jones Industrial Average fell 0.68%, the S&P 500 lost 1.18% and the Nasdaq Composite dropped 1.77%.
Major bourses in Europe closed mostly higher, with the pan-European STOXX 600 index up 0.28% following a retreat from nine-month highs earlier in the session after Fed policymakers sounded a more hawkish tone.
Aggressive rate hikes by the Fed and other central banks last year to tame inflation hurt equities and boosted the dollar. But those trends have reversed this year on signs that inflation has started to slacken, raising hopes of rate cuts toward the end of 2023.
Futures are pricing in the Fed's overnight lending rate to peak at 5.142% in July, about 25 basis points higher than last week, and that by December it will have declined to 4.821%, a jump of about 40 basis points since a week ago.
Treasury yields held near one-month highs as investors adjusted for the likelihood that the Fed will hike rates further than previously expected, following the blockbuster U.S. jobs report for January.
The yield on 10-year Treasury notes fell 2.3 basis points to 3.651%, while those on two-year notes lost 1.5 basis points to 3.651%
The Treasury curve measuring the gap between yields on two- and 10-year Treasury notes, seen as a recession harbinger when the short end is higher than longer-dated securities, was inverted at -80.7 basis points.
In Europe, bonds continued to sell off following a sharp tumble the previous day after the European Central Bank said it would cut the interest rate it pays governments on deposits.
Two-year German yields, the most sensitive to any shifts in expectations for interest rates and inflation, rose by as much as 11 basis points to 2.725% in early trading, their highest since Jan. 3.
Oil rose for a third straight day as investors felt more comfortable with risk a day after Powell's remarks eased their worries about future rate hikes.
U.S. crude futures settled up $1.33 at $78.47 a barrel, while Brent rose $1.40 to settle at $85.09.
Gold prices edged up in a choppy session, tracking a pullback in the dollar, while investors looked forward to more economic data to gauge the Fed's rate-hike strategy.
U.S. gold futures rose 0.5% to $1,875.40 an ounce.
(Reporting by Herbert Lash, additional reporting by Alun John in London, Ankur Bannerjee; Editing by Kirsten Donovan and Jonathan Oatis)