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Fed keeps rates steady but eyes rising price, unemployment

risks

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U.S., China to discuss trade in Switzerland at weekend

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Dollar rises, European stocks fall

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U.S. stock indexes end choppy session higher with late

rally

(Updates prices after U.S. stock market close)

By Sinéad Carew and Yoruk Bahceli

NEW YORK/LONDON, May 7 (Reuters) - Equities rose in a

volatile session on Wednesday but U.S. Treasury yields fell

after the Federal Reserve left interest rates unchanged while

warning of higher inflation and labor market risks.

While trading was choppy after the Fed statement and

comments from its chair, Jerome Powell, stocks had a

late-session rally as chipmakers jumped after Bloomberg reported

that President Donald Trump's administration plans to rescind

artificial-intelligence chip curbs made by the Biden

administration.

This was after the Fed said it held rates steady, in line

with expectations. But while the U.S. central bank said the

economy continued to expand at a solid pace, it noted that risks

of higher inflation and unemployment had risen as it grapples

with the impact of Trump's tariff policies.

The risks of higher unemployment and higher inflation left

the Fed with almost no good short-term options, said Julia

Hermann, global market strategist at New York Life Investments.

"Their ability to preemptively cut rates to shore up

economic growth is constrained by upside inflation risks, and

then, conversely, their ability to preemptively hike rates to

reduce inflation risk is constrained by downside risk to

growth," she said. "So it's a stagflation conundrum."

"We expect to see meaningful easing from the Fed only in the

scenario that economic growth figures really disappoint."

Citing uncertainty due to the potential for macro-economic

fallout from tariff policies, Adam Reinert, chief investment

officer at Marshall Financial, said: "the Fed needs to retain

their conviction and confidence. In the near term, we believe

Jay Powell and his team may have to become comfortable with

being uncomfortable."

Investors were also focused on the prospects for progress on

U.S.-China trade relations during Wednesday's session.

U.S. Treasury Secretary Scott Bessent and chief trade

negotiator Jamieson Greer are scheduled to meet China's top

economic official for talks over the weekend in a potential

first step for peace after Trump ignited a trade war with the

world's No. 2 economy last month.

Bessent said his sense is that the meeting in Switzerland

"will be about de-escalation," while China sounded more guarded

and cited a proverb about actions speaking louder than words.

On Wall Street, the Dow Jones Industrial Average rose

284.97 points, or 0.70%, to 41,113.97, the S&P 500 rose

24.37 points, or 0.43%, to 5,631.28 and the Nasdaq Composite

rose 48.50 points, or 0.27%, to 17,738.16.

MSCI's gauge of stocks across the globe rose

2.12 points, or 0.25%, to 844.03, after falling by around 0.4%

earlier. The pan-European STOXX 600 index closed down

0.54% earlier in the day.

In currencies, trading was choppy after the Fed statement

and as Powell took questions from reporters, but ultimately the

U.S. dollar remained slightly stronger against major currencies

including the yen and the euro.

The dollar index, which measures the greenback

against a basket of currencies including the yen and the euro,

rose 0.42% to 99.92.

The euro was down 0.62% at $1.1297 while against the

Japanese yen, the dollar strengthened 1.03% to 143.88.

Sterling weakened 0.64% to $1.3282. The Canadian

dollar weakened 0.41% to C$1.38 per U.S. dollar.

In U.S. Treasuries, yields slipped after the Fed's update.

The yield on benchmark U.S. 10-year notes fell

4.9 basis points to 4.269% from 4.318% late on Tuesday while the

30-year bond yield fell 4.1 basis points to 4.7718%.

The 2-year note yield, which typically moves in

step with Fed interest rate policy, fell 0.8 basis point to

3.781%, from 3.789% late on Tuesday.

Oil prices fell by more than $1 a barrel as investors

doubted that the upcoming U.S.-China trade talks will result in

a breakthrough, while hopes for an Iran-U.S. nuclear deal eased

supply worries.

U.S. crude futures settled down 1.73%, or $1.02, at

$58.07 a barrel while Brent settled at $61.12 per

barrel, down 1.66%, or $1.03, on the day.

In precious metals, gold prices extended losses, weighed by

a stronger dollar and easing China-U.S. trade tensions, while

traders were left dissatisfied by Powell's cautious remarks

about the U.S. economy.

Spot gold fell 1.8% to $3,367.70 an ounce. U.S. gold

futures fell 1.37% to $3,364.70 an ounce.