[NEW YORK] The dollar rallied while US stocks dipped on 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 emphasised that recent price hikes are temporary.

Mr 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."

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The broad-based S&P 500 finished down 0.5 per cent at 4,223.79 after falling more than one per cent 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 per cent 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 per cent as it again boosted its investment plan for electric and autonomous vehicle technology. The auto giant now expects to spend US$35 billion through 2025, up 30 per cent from its prior plan.

AFP