Interest rate futures show the U.S. central bank will start cutting rates as soon as next month, with as many as three rate cuts priced by year-end.
Fed Chairman Jerome Powell did not question the market rethink of the U.S. interest rate trajectory on Tuesday.
He dropped his standard reference to the Fed being "patient" in approaching any rate decision and said the central bank was watching fallout from the trade war and would react "as appropriate".
The Fed chairman's comments come a day after St. Louis Federal Reserve President James Bullard said in a speech that a rate cut may be needed "soon".
Stock markets responded positively to Powell's comments, with U.S. stocks registering their biggest one-day gains in five months.
"The last 24 hours has seen a marked change in sentiment and although it’s hard to completely attribute the move to Powell’s comments at the Fed conference yesterday, the fact that the Chair seemingly didn't push back on very dovish market pricing did at least fill investors with a bit more confidence," said Jim Reid, strategist at Deutsche Bank.
The optimism rolled over into markets on Wednesday, with the MSCI All-Country World Index up 0.4% by midday in London, adding further to a 1.4% gain on Tuesday. The index is up 1.8% percent on the week so far and on track for its best weekly performance since early April.
S&P 500 futures were up 0.7%, indicating a buoyant open on Wall Street.
Jasper Lawler, head of research at London Capital Group, warned that the support markets were drawing from central banks could be short-lived.
"Let's not forget the other half of the equation is the escalating trade war on multiple fronts. Today the markets are happy to focus on Fed support, but with the U.S. Commerce Department promising retaliation in the event of China's rare earth's threat, this trade war looks set to get worse before it gets better."
China's dominance as a supplier of mineral elements known as rare earths that are used in industry could be a vital bargaining chip in the trade war with the Unite States. C
China is willing to meet reasonable demand for rare earths from other countries, but it would be unacceptable that countries using Chinese rare earths to manufacture products would turn around and suppress China, its commerce ministry said last week.
The International Monetary Fund (IMF) cut its 2019 economic growth forecast for China to 6.2% on heightened uncertainty around trade frictions, saying that more monetary policy easing would be warranted if the Sino-U.S. trade war escalates.
European markets opened flat to marginally higher, but most bourses barring Britain's FTSE 100 registered gains of nearly 0.5% by 1111 GMT. The pan-European STOXX 600 index was up 0.5%.
Italian sovereign bond prices and bank stocks fell after the European Commission concluded that Italy is in breach of EU fiscal rules because of its growing debt, a situation that justifies the launch of a disciplinary procedure.
In bonds, Germany's 10-year bond yield reached a record low and Italian debt held on to this week's gains as investors ramped up their bets on a generous loan package for banks in the euro zone as well as a U.S. rate cut.
In currencies, the Fed comments weakened the dollar for a fifth consecutive day, lifting the euro and pushing investors into safe-haven assets including the Japanese yen. The dollar struggled near a seven-week low.
"Given the extent of the dovish re-pricing of the Fed outlook and the collapse in U.S. treasury yields in recent weeks, the dollar losses appear fairly muted in this context," said Chris Turner, head of FX strategy at ING in London.
In commodity markets, oil prices resumed their slide, dragged down by a surprise gain in U.S. inventories and comments from the head of Russian state oil producer Rosneft questioning the point of a deal with OPEC to withhold supplies.
U.S. crude retreated 0.6% to $53.16 a barrel. Brent crude futures gained 0.05% to $62.00 per barrel.
(Reporting by Ritvik Carvalho; additional reporting by Sujata Rao and Tom Finn in London, and Tomo Uetake in Tokyo; editing by Andrew Heavens) ((Ritvik.Carvalho@thomsonreuters.com; +44 2075429406; Reuters Messaging: firstname.lastname@example.org))