Stocks finished lower Wednesday after the Federal Reserve left interest rates unchanged but signaled it expected to boost interest rates two times by the end of 2023, earlier than anticipated.
“Progress on vaccinations has reduced the spread of COVID-19 in the United States,” the Federal Reserve's policy-setting body, the Federal Open Market Committee, said in a statement Wednesday.
“Amid this progress and strong policy support, indicators of economic activity and employment have strengthened,” the statement added.
The Dow Jones Industrial Average fell 265 points, or 0.77%, to 34,033, the S&P 500 dropped 0.54% and the Nasdaq slipped 0.24%
The S&P 500 was down as much as 1% after the Fed's announcement and the Nasdaq declined 1.2% before rebounding.
The yield on the benchmark 10-year Treasury note jumped on Wednesday to 1.572%.
The central bank also lifted its expectations on inflation to 3.4% but maintained its stance that inflation pressures would be “transitory.”
At a news conference, Fed Chairman Jerome Powell said inflation the past couple of months had come in above expectations. But he added that categories affected by the economy's reopening were seeing the biggest gains.
The Fed left its benchmark policy rate unchanged at zero to 0.25% and said it would continue to buy $120 billion of bonds monthly until “substantial further progress” had been made on employment and inflation.
The number of Fed governors who expect rate hikes as early as 2022 - known as the dot plot - went to seven from four, essentially translating into two 2023 rate hikes based on growth and inflation projections from the 18 members of the FOMC.
"Now it will be up to (Fed Chairman Jerome) Powell and other Fed speakers to once again reassure markets that tightening in 2023 doesn’t need to be disruptive," said Seema Shah, chief strategist of Principal Global Investors.
"There will still be question marks about the timing of tapering but, overall, the dot plot shouldn’t unnerve the market too much, as long as Powell gets his communication on target."
The Fed wasn't expected to take any action with respect to rates or a tapering of its $120 billion of monthly asset purchases.
But Wall Street was closely watching the meeting for the Fed's forecasts on inflation and indications of when the central bank might begin pulling back on monetary stimulus.
Prices at the consumer and wholesale levels in the U.S. have been rising steadily the past few months. The Fed has been trying to assure markets that higher inflation will be only temporary as the U.S. economy recovers from the coronavirus pandemic.