The dollar rallied while US stocks dipped Wednesday after the Federal Reserve sent signals it was moving closer to tightening monetary policy while downplaying recent signs of inflation.

Following a near-flat session on European equity bourses and a down day in Asia, US stocks hit session lows shortly after the Fed released projections showing US central bankers raised their inflation and growth forecasts and a majority now expect interest rate hikes in 2023.

However, equities recovered somewhat during Fed Chair Jay Powell's press conference as he emphasized that recent price hikes are temporary.

Powell said the committee is not focused on raising lending rates but has started discussions on when to taper the pace of bond purchases as its first move towards pulling back on the pandemic stimulus measures.

He said the Fed will give plenty of notice before making any major changes, and will "do what we can to avoid a market reaction."

Jason Schenker of Prestige Economics said the overall message was "highly accommodative," but included "some hawkish changes at the margin."

The broad-based S&P 500 finished down 0.5 percent at 4,223.79 after falling more than one percent earlier.

The movements in foreign exchange markets were less volatile, with the dollar gaining ground after the Fed announcement and essentially holding the gains afterwards.

BK Asset Management's Kathy Lien said the greenback could have more running room higher.

"Given how long investors have been waiting for the central bank to talk taper and how uncertain they were as to whether it would happen today, we see further gains in the dollar," she wrote. "The Fed's optimism is a reflection of their belief that economic data will continue to improve in the coming months."

Elsewhere, London stocks added 0.2 percent as investors weighed data showing higher inflation, with clothing, fuel and oil prices rebounding as the economy reopens.

Among individual companies, General Motors jumped 1.6 percent as it again boosted its investment plan for electric and autonomous vehicle technology. The auto giant now expects to spend $35 billion through 2025, up 30 percent from its prior plan.

New York - Dow: DOWN 0.8 percent at 34,033.67 (close)

Traders have been biding their time ahead of the Federal Reserve's policy meeting, which concludes later Wednesday Traders have been biding their time ahead of the Federal Reserve's policy meeting, which concludes later Wednesday Photo: AFP / Daniel ROLAND

New York - S&P 500: DOWN 0.5 percent at 4,223.70 (close)

New York - Nasdaq: DOWN 0.2 percent at 14,039.68 (close)

London - FTSE 100: UP 0.2 percent at 7,184.95 (close)

Frankfurt - DAX 30: DOWN 0.1 percent at 15,710.57 (close)

Paris - CAC 40: UP 0.2 percent at 6,652.65 (close)

EURO STOXX 50: UP 0.2 percent at 4,151.76 (close)

Tokyo - Nikkei 225: DOWN 0.5 percent at 29,291.01 (close)

Hong Kong - Hang Seng Index: DOWN 0.7 percent at 28,436.84 (close)

Shanghai - Composite: DOWN 1.1 percent at 3,518.33 (close)

Euro/dollar: DOWN at $1.2003 from $1.2126 at 2100 GMT

Pound/dollar: UP at $1.3988 from $1.4083

Euro/pound: DOWN at 85.72 pence from 86.11 pence

Dollar/yen: DOWN at 110.64 yen from 110.08 yen

Brent North Sea crude: UP 0.5 percent at $74.39 per barrel

West Texas Intermediate: UP less than 0.1 percent at $72.15 per barrel