All three main indexes in New York were sent spinning Wednesday -- led by a rout in high-flying tech titans -- after the Fed delivered what was described as a "hawkish cut" in rates.
Some suggested the retreat may have also been fuelled by president-elect Donald Trump's opposition to a spending package aimed at averting a fast-approaching US government shutdown.
While the reduction had been widely expected, its closely watched "dot plot" of projections for further moves suggested the bank will cut rates just twice next year, as opposed to the four previously forecast.
Investors had already been speculating about how the Fed would position itself as Trump prepares to take office amid warnings that his plans to cut taxes, slash regulations and impose tariffs on China could reignite inflation.
That was followed by Powell's comments in which he indicated that the battle against inflation was key because it has remained stubbornly above the bank's two percent target.
"We need to see progress on inflation," he said in a news conference. "We moved quickly to get to here, but moving forward we are moving slower."
While the Fed lifted its economic growth outlook, the prospect of rates staying higher than anticipated for longer dealt a hefty blow to markets, with the S&P 500 losing three percent and the tech-heavy Nasdaq more still.
The dollar also cruised higher against its peers and was sitting around a two-year high against the euro.
Asian markets all fell, with Tokyo, Hong Kong, Shanghai, Sydney, Seoul, Taipei, Bangkok, Singapore, Wellington, Manila and Jakarta all well down.
Jack McIntyre, a portfolio manager at Brandywine Global, said the rate cut had already been priced in by markets but "when you include the forward guidance components, it was a hawkish cut".
"Stronger expected growth married with higher anticipated inflation -- it's no wonder the Fed reduced the number of expected rate cuts in 2025.
"The results of this meeting raise the question: if the market wasn't expecting a rate cut today, would the Fed actually have delivered one? I suspect not.
"The Fed has entered a new phase of monetary policy, the pause phase. The longer it persists, the more likely the markets will have to equally price a rate hike versus a rate cut. Policy uncertainty will make for more volatile financial markets in 2025."
The yen weakened to as much as 155.44 per dollar -- from around 153.57 earlier in the day -- after the Bank of Japan's decision not to hike rates for a third time this year. The announcement did help the Nikkei 225 stock index pare earlier losses, though.
While officials said in policy statement that "Japan's economy has recovered moderately" and "is likely to keep growing", they also pointed to risks ahead.
These include "developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behaviour".
Key figures around 0340 GMT
Tokyo - Nikkei 225: DOWN 0.6 percent at 38,847.86
Hong Kong - Hang Seng Index: DOWN 1.0 percent at 19,662.89
Shanghai - Composite: DOWN 0.7 percent at 3,357.82 (break)
Euro/dollar: UP at $1.0380 from $1.0365
Pound/dollar: UP at $1.2589 from $1.2581
Dollar/yen: UP at 155.30 yen from 154.73 yen
Euro/pound: UP at 82.46 pence from 82.38 pence
West Texas Intermediate: DOWN 0.6 percent at $70.19 per barrel
Brent North Sea Crude: DOWN 0.4 percent at $73.08 per barrel
New York - Dow: DOWN 2.6 percent at 42,326.87 (close)
London - FTSE 100: UP 0.1 percent at 8,199.11 (close)
