Wall Street stocks tumbled on Wednesday after the Federal Reserve lowered interest rates but also slashed the number of 2025 rate cuts in its forecast.

All three major indices finished firmly lower after the Fed projected just two interest rate cuts next year, down from four.

The Dow slid 2.6 percent, or more than 1,100 points, to 42,326.

The S&P 500 dropped 3.0 percent to 5,872, while the Nasdaq slumped 3.6 percent to 19,392.

"Seeing the kind of decline we are experiencing right now indicates that the Fed took the market quite by surprise," said CFRA Research's Sam Stovall.

Although stocks often enjoy a late-year bounce referred to as the "Santa Claus rally," Stovall said the depth of Wednesday's drop could spur more selling if traders take profits.

"Maybe Santa is already on vacation," he said.

The US central bank, as expected, moved ahead with a decision to reduce interest rates by a quarter point as Fed Chair Jerome Powell offered an upbeat appraisal of the US economy.

However, the announcement was coupled with the altered outlook on 2025 monetary policy.

After the latest interest rate cut, the Fed is now "significantly closer" to the point where no further cuts will be needed, said Powell, who emphasised the central bank still views two percent inflation as a critical long-term priority.

In the last couple of months, the Fed's favoured inflation measure has ticked higher, moving away from the bank's long-term target of two percent.

Wall Street's reaction suggests the investors are "grappling" with the likelihood that interest rates "for all intents and purposes, are going to remain higher for longer," said Briefing.com.

Wednesday's losses were broad-based with 29 of 30 companies in the Dow ending lower and all 11 sectors in the S&P 500 finishing in the red. (AFP)