While the Fed admitted that 'the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation (and) ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained,' it also noted that 'possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.'

To that end, the Fed said 'some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.' The FOMC concluded that it will 'respond to changes in economic prospects as needed to foster these objectives.'

Although the specter of future rate hikes -- unknown in quantity -- pushed the yield on the benchmark 10-year note close to 4.8 percent before receding, Treasuries sold earlier on the strength of the consumer confidence report that showed confidence in March at its highest level since May 2002. The index climbed to 107.2 from an upwardly revised 102.7 reading in February. The report, however, showed that while those surveyed were confident about their present situations, they were less optimistic about the future.

Although selling picked up after the Fed's announcement around 2:15 pm EST, and Treasury yields, which move in the opposite direction of prices, have risen, it is too early to see any effect on mortgage rates, which remain near yesterday's levels.

Stocks tumble on Fed statement

The Dow Jones industrials led the Wall Street sell-off, with 29 of the 30 components closing in negative territory. Investors found nothing to celebrate in the Fed statement that spoke of the threat of inflation and higher interest rates. In addition, oil prices topped $66 a barrel due to problems in Nigeria, uncertainty over supply from Iran and Iraq, and strikes in France and Norway.

Hewlett-Packard suffered the steepest loss, plunging 3.14 percent on the session, but there were nine other components with hefty 1-percent declines. Home Depot was the only Dow member to be spared, as it closed flat on the day. Many stocks that were climbing earlier couldn't hold their gains, but Lennar Corp. was an exception. The home builder added 1.2 percent after beating earnings estimates and reporting an increase in orders.

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