NEW YORK (Reuters) -The Federal Reserve held interest rates steady on Wednesday and policymakers indicated borrowing costs are still likely to fall this year, but slowed the overall pace of expected future rate cuts in the face of estimated higher inflation stemming from the Trump administration's tariff plans.

In new economic projections, policymakers sketched a modestly stagflationary picture of the U.S. economy, with economic growth slowing to 1.4% this year, unemployment rising to 4.5% by the end of this year, and inflation finishing 2025 at 3%, well above the current level.

While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March and December, they slightly slowed the pace to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to the central bank's 2% target.

MARKET REACTION:

STOCKS: The S&P 500 briefly added to gains before fading and was last up 0.27%

BONDS: The yield on benchmark U.S. 10-year notes was down 2.2 basis points to 4.369%. The 2-year note yield fell 3.6 basis points to 3.914%

FOREX: The dollar index extended declines and was down 0.23% to 98.60, with the euro up 0.3% at $1.1512.

COMMENTS:

MOLLY BROOKS, US RATES STRATEGIST, TD SECURITIES, NEW YORK:

"The market reaction was somewhat muted, even though going in it seemed at least economists' estimates of the dots for 2025 seemed a bit split between one and two. The markets didn't really seem to react to staying at two as very dovish here. I think some of it is the statement, it seemed to be continuing on the whole waiting-and-seeing, waiting-and-watching trend that the Fed has been on.

"Part of the 2025 dots that we were looking at is a time decay piece, where you're seeing less meetings in 2025 than we did in March, and we'll see even less in the next SEP, and so as time continues, if they don't cut, then you have to keep pushing out the cuts to 2026."

JACK MCINTYRE, PORTFOLIO MANAGER FOR GLOBAL FIXED INCOME, BRANDYWINE GLOBAL INVESTMENT MANAGEMENT, PHILADELPHIA, PA:

"There's still bias towards some version of stagnation, lower growth with rising sticky inflation.

" It feels like it's a Fed that's still being very patient, and they're still biased towards cutting rates in the near future."

MICHAEL JAMES, EQUITY SALES TRADER, ROSENBLATT SECURITIES, LOS ANGELES

"I don't think there was too much of a surprise in what we saw. The Fed took up the inflation expectations - obviously to be conservative in terms of the potential impact of tariffs - and took down their growth forecast slightly. That was somewhat expected. I don't think there was anything that was needle moving.

"Now the nuances come in with Chairman Powell's answers and body language at the press conference."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:

"The Fed is looking at slower economic growth and the vote was unanimous and the fact that rates remain unchanged is no surprise.

"They do state that the economy is slowed, but still on solid footing. The dot plot is looking for two cuts this year and of course they repeat the fact that if need be, they would reconsider their present monetary (stance).

"So you know that's nothing new and we really don't have any much change here and so I would say that this statement is a little bit on the hawkish side, and I would characterize it as the same for the last month with the caveat that we could we could see slower and as far as the labor market is concerned, there's not much change in thinking there."

"So, I would say this communique indicates that if things were to slow down too much in the summer months. or if there we see negative growth in this quarter, that Fed is likely to reduce interest rates by 50 basis points once, in September, as opposed to two 25 bp rate cuts."

"What does this mean for the market? I don't think very much."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:

"There's a subtle shift in the language about the unemployment rate. They're no longer confident that it has stabilized. The balance of risks is shifting from being in balance to being tilted towards a slowdown. Instead of watching inflation like a hawk, the Fed is shifting its gaze to the labor market. The unemployment rate will be an unreliable gauge of the health of the labor market with the immigration crackdown and decline in the labor force participation rate. Instead, Powell might pull a Yellen and start talking about a wide range of labor market indicators they're monitoring."

MATTHIAS SCHEIBER, HEAD OF THE MULTI-ASSET TEAM, ALLSPRING GLOBAL INVESTMENTS, LONDON:

With the ongoing uncertainty around tariffs and a still-robust U.S. labor market, the Fed is taking a widely expected "wait and see" approach on rates. From our perspective, the next likely window for the Fed to lower rates will be September. We expect the Fed to potentially cut interest rates twice this year should inflation continue to drop toward its 2.0% target.

"We expect equity market performance to remain volatile and continue to favor cheaper parts of the U.S. equity market, international equities, and emerging market equities given better valuations, more fiscal and monetary stimulus likely to come, and higher valuations of a number of U.S. large-cap equities. Our outlook for higher-quality bonds remains favorable given still-attractive overall yields."

(Compiled by the Global Finance & Markets Breaking News team)