(Reuters) - Federal Reserve Chairman Jerome Powell on Friday moved to mollify financial markets concerned about a U.S. economic slowdown, saying that while momentum is solid, the U.S. central bank will be sensitive to the downside risks the market is pricing in.

MARKET REACTION:

STOCKS: Major indexes are at the day's high, up between 2.7 percent and 3.5 percent

BONDS: 2- and 10-year Treasury yields jump to session highs, fully retracting the previous session's big declines; 2s last at 2.48 pct, 10s at 2.65 pct

FOREX: The dollar index gives back all of its gains from the payrolls report, with the greenback weaker against both euro and yen

RATE FUTURES: Fed funds contract for January 2020 drop further, retracing about two-thirds of the previous day's gains

COMMENTS:

PETER CECCHINI, MANAGING DIRECTOR AND CHIEF MARKET STRATEGIST, CANTOR FITZGERALD, NEW YORK:

"My thought around the recent press conference the Fed had was that the Fed communication was bumbled and that the chairman had to walk back his overly hawkish tone and that's exactly what he did today."

"Introducing the word flexibility to rate hikes and to the balance sheet took away a lot of the uncertainty that he had created for risk assets. With balance sheet reduction on autopilot, he made it sound as if they on course to do a certain thing and that they weren't going to pay attention to financial markets."

"And I think he introduced enough new nuance into his statement today to assure market participants that they're going to be a bit more flexible than had previously been perceived."

JAMES ATHEY, SENIOR INVESTMENT MANAGER, ABERDEEN STANDARD INVESTMENTS, LONDON:

"The biggest concern was the idea that the balance sheet unwinding was being done on autopilot, which sounds scary to the market. Powell just softened that notion a little."

"He's saying the right things: that the Fed is prepared to shift, that it's listening carefully, that it's sensitive to the messages the market is sending ... but he's not shouting 'fire' in a crowded theater. He told the market, yes, of course we're not going to become part of the problem instead of part of the solution, but he underscored that the Fed is engaging in tightening policy because the economy is doing well. It's a good message for the market that is starting to consume itself out of fear."

ROBERT PAVLIK, CHIEF INVESTMENT STRATEGIST AND SENIOR PORTFOLIO MANAGER, SLATESTONE WEALTH LLC, NEW YORK:

"The fact that he said that he said that the Fed is going to be patient and flexible with rate hikes, leads the markets to believe that the indication of two rate hikes in 2019 may not come to fruition and we may see at the most one or no rate hikes and that means the markets are feeling better that the Fed is not strangling the overall economy and perhaps forcing it into a recession and that removes a monetary policy concern that has been hanging over the market for the past few months."

"If the Fed does not bring us any closer to a slowdown by raising interest rates, then you can extrapolate that into positive things for the global economy."

"A further Fed rate hike would slowdown the economy to the point where no one is looking for a loan, no one is going to be looking to borrow money during a recession so it impacts banks more with additional rate hikes despite the fact that higher rates mean a better net interest margin environment for financials."

JIM VOGEL, INTEREST RATES STRATEGIST, FTN FINANCIAL, MEMPHIS, TENNESSEE:

"It's certainly close to what the market wanted to hear. The Fed needs to rebuild market confidence in its communications and today is the first great step. Markets also appreciated Powell's emphatic response to Washington's critical comments about him."

ALFONSO ESPARZA, SENIOR CURRENCY ANALYST, OANDA, TORONTO:

"Powell talked about the jobs data, which was strong, but he also acknowledged that data has been mixed in the States."

"The gist of his speech was about what the central bank is expected to do and not expected to do. He mentioned that there is no pre-set path. Basically getting back to being data- dependent, politics aside, geopolitics aside, unless they start affecting the data."

"He meant well but I think he was not able to turn the whole narrative on its head on what's going to happen with the Fed in 2019. Two rates hikes were expected two or three weeks ago and now it would not be a total shock if there is a rate cut this year."

"I think he was not as forceful as some people, myself included, expected him to be. That is what took a bit of the wind out of the sails of the dollar, especially after a somewhat solid NFP report."

CHUCK CARLSON, CHIEF EXECUTIVE OFFICER, HORIZON INVESTMENT SERVICES, HAMMOND, INDIANA:

"A big issue that has been impacting investor psyche concerning the market has been trying to calibrate the economy and what kind of slowdown is going to occur, and the concern about an economic slowdown as well as a potential earnings recession because of that economic slowdown."

"Today they got some data points that would indicate from a jobs standpoint things are still pretty solid. And there seem to be maybe more impressions from the Fed about how aggressive they're going to be to raise interest rates in 2019 or at least how they're going to view the decision to raise interest rates or not that seemed a bit more palatable for Wall Street."

ERIC VILORIA, FX STRATEGIST, CREDIT AGRICOLE, NEW YORK:

"Powell's comments that the Fed is prepared to alter policy expectations quickly and flexibly are weighing on the USD and giving risk sentiment a boost. He cited the 2015/2016 period when developments outside of the US delayed rate normalization plans. Overall, Powell's tone is cautious which is contributing to USD softness."

JUAN PEREZ, SENIOR CURRENCY TRADER AT TEMPUS INC, IN WASHINGTON:

"Thursday was somber, too dark, everyone panicked almost overwhelmed by bad news on all business and trade fronts. Now, we go back to measured and moderate tones from our leaders, the Fed chairs all sitting together and saying 'Hey! Market! We hear your concern on downside risks, but relax, 2018 was overall a good economic year, things might just moderate.' That tone, that message, eased market concerns and we are glad to see that. It goes along with our dollar narrative that indeed the dollar can afford to shed some value.

"On the Trump question and Fed independence, I'd say they all took a vow in unison to protect their agency/institution. Trump might have other things to worry about and the focus won't be as much on Powell's tenure."

THOMAS SIMONS, MONEY MARKET ECONOMIST, JEFFERIES & CO, NEW YORK:

"I think that there were two things that Powell really needed to do with the speech today. It was important to address threats to the Fed's independence coming from the administration. I think he did that very effectively ... He said they're going to do what they believe is appropriate regardless of input from anyone else."

"To that end I think it was very important that he clarified a point they attempted to send in the Dec 19 policy statement. Which is that if you look at the summary of economic projections, the dots suggest a lower trajectory of rate hikes for 2019."

"But the market and a lot of commenters in the media were focused on the fact that they had raised rates though there had been weaker inflation and weaker stocks going into that meeting. I think that lead to inappropriate expectations that the Fed would blindly continue to raise rates in the face of weakening economic conditions. He was effective in saying today that would not be the case."

:And most importantly, acknowledging the fact that inflation has fallen a little short of the dual mandate expectations is almost a back door signal that they're going to be slowing rate hikes in the near future."

TOM DI GALOMA, MANAGING DIRECTOR, SEAPORT GLOBAL HOLDINGS, NEW YORK:

"Powell's statement that the Fed is always prepared to shift stance of policy is truly defining moment for equity market bounce. There is great relief that Powell has pulled back on his hawkish rhetoric and is a bit more conciliatory. He is a more flexible in his views and this in turn has taken pressure off the equity markets generally."

BOB SMITH, PRESIDENT, SAGE ADVISORY SERVICES LTD CO, AUSTIN:

"It doesn't change anything to sit there and say 'I'm flexible' and 'we're going to be flexible.' What the world is trying to figure out is what does that mean if you're going to talk about it in terms of rates that's one thing. If you're going to talk about it in terms of leverage and unwinding the balance sheet that's another thing and the important thing."

"We've been in the position of fading the rallies. … We're still very suspect. We're cautious."

LOU BRIEN, MARKET STRATEGIST, DRW TRADING, CHICAGO:

"It's not that he's changed his message from the FOMC, but that he explained it more patiently and in greater detail."

"In the FOMC statement and in the post meeting press conference he thought it was sufficient just to say that a couple of changes in the statement was enough to indicate uncertainty on the future path of the funds rate and really it was not taken that way."

"It was really I think a miscommunication. And I think it was a series of miscommunications that he'd had since early October. And so I thought it was interesting that he came out with, not a prepared statement, but what appeared to be several cheat sheets to ensure that he hit the points that he wanted to and didn't miss any in a way that he had prepared, so that the message he was sending would be more clearly heard."

"This is better than having an uncertain economy and a Fed that was interpreted as leaning hawkish. But I don't know if it sufficient just because he was able to put pen to paper and say stuff that he meant to say in December."

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES FOR CHARLES SCHWAB IN AUSTIN, TEXAS:

"His (Powell's) comments are being interpreted as dovish. The things he said today, are leading traders, investors to believe that the Fed is willing to potentially change their projections for rate hikes this year."

"What we have seen in the past is that the markets seem to be dictating the Fed's next moves and that is how the markets are looking at it right now."

"At the moment, the (stock) markets are interpreting the speech in a way that it reduces the likelihood of future interest rate hikes."

"What did change was the probability of a rate cut happening this year which was also something the markets had been pricing in, which dropped to 30 percent from 50 percent. This shows that the markets want to move towards a neutral rate."

JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET WEALTH ADVISORS, CHICAGO:

"That's just reiterating the law he lay down in December. The inference is that he's not going to come to the rescue of the market either because he doesn't want to or because the Fed doesn't have the wherewithal."

"News of trade talk with China was welcome and a powerful jobs report provided a double shot of espresso to the market to wake up investors today. Investor sentiment has been in the cellar … so anything that's slightly positive would be viewed as good news."

(Americas Economics and Markets Desk; +1-646 223-6300)

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