(Adds U.S. market close)
By Herbert Lash
NEW YORK, Sept 21 (Reuters) - U.S. stocks rose, then slumped while Treasury yields surged and then fell on Wednesday as markets reacted wildly to a bleak economic picture next year after the Federal Reserve adhered to a tough stance to fight inflation by jacking up interest rates.
The three main stock indices jolted up and down, the yield on benchmark 10-year Treasury notes spiked to 3.6401% and the dollar surged to a fresh two-decade high after the Fed raised rates by 75 basis points as expected.
The Fed also said in a statement following a two-day meeting of policymakers that it expects its policy rate to hit 4.4% by year's end and rise to 4.6% by the end of 2023.
The Fed's aggressive drive to lower inflation to its 2% target will take years and comes at a cost of slower growth and higher unemployment, according to projections from policymakers that cast doubt on market hopes for a "soft landing."
The projections show Americans are in for some pain as the U.S. central bank works to end inflation and prevent what Fed Chair Jerome Powell has said would otherwise be even worse outcomes.
"The Fed reset the expectations in order to eliminate counterproductive speculation by market participants of a pivot, for now," said Johan Grahn, head of ETFs at Allianz Investment Management LLC in Minneapolis.
"It's a logical action by a 'Volcker-courageous' Fed, but one that they can walk back at a later date if needed," Grahn said, referring to former Fed chief Paul Volcker, who tamed double-digit inflation four decades ago by inducing a recession.
Stocks on Wall Street tried to rally several times, without luck. After 10 years of abnormally low rates, investors have yet to figure out how to position their portfolios, said Carol Schleif, deputy chief investment officer at BMO family office in Minneapolis.
"It takes a while to anchor to the new normal," Schleif said. "Investors keep wanting to hear something more positive, and they weren't hearing that positive tilt they wanted."
Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Wellesley, Massachusetts, said the equity market was a little bit too optimistic that the Fed might soften its language.
After the the past four meetings of the Federal Open Market Committee, stocks rallied only to fall the following day.
"A lot of times you see (the market) do something on the day of and then something else the next day. Investors might want to reserve judgment until tomorrow," Hazen said, when stocks were trading higher on the day.
The Dow Jones Industrial Average closed down 1.7%, the S&P 500 lost 1.71% and the Nasdaq Composite dropped 1.79%.
After an initial negative reaction, markets mostly shrugged off Russian President Vladimir Putin accusing the West of "nuclear blackmail," remarks that sparked a flight to safe-haven assets like gold and bonds.
The pan-regional STOXX 600 index in Europe closed up 0.90% after earlier sliding to its lowest level since early July when Putin announced the military mobilization. MSCI's gauge of stocks worldwide fell 1.55%.
The 10-year Treasury yield fell 5.7 basis points to 3.516% after a big spike following the Fed statement. Two-year yields were last at 4.0506%, after earlier hitting 4.123%, the highest since October 2007.
The closely watched yield curve between two- and 10-year notes inverted further to minus 53 basis points, indicating concerns about a recession in the next year or two.
The dollar index rose 1.026%, with the euro down 1.27% to $0.9843. The Japanese yen weakened 0.19% versus the greenback at 143.98 per dollar,
Oil prices fell after the Fed hiked rates to quell inflation as it may also reduce economic activity.
Brent crude futures settled 79 cents lower at $89.83 a barrel, its lowest close in two weeks, while U.S. West Texas Intermediate (WTI) crude fell $1.00 to $82.94, its lowest close since Sept. 7.
U.S. gold futures settled up 0.3% at $1,675.70 an ounce.
Bitcoin was mostly flat, up 0.04% at $18,886.00.
(Reporting by Herbert Lash, additional reporting by Caroline Valetkevitch and Sinéad Carew in New York; Editing by David Gregorio and Jonathan Oatis)