Investors see a roughly 47% chance of a rate rise by the end of the year, according to Fed-fund futures tracked by CME Group.
Looking ahead, the GBP/USD exchange rate is likely to tumble tomorrow with the release of the UK's latest consumer confidence data, with the index expected to slide from -10 to -11 in July as household finances come under increasing pressure due to the continued decline in real wages in the face of soaring inflation.
Randy Quarles, a former Treasury official whom Trump has picked for one of three empty spots on the Fed's board, will go before the Senate Committee on Banking, Housing and Urban Affairs on Thursday in a nomination hearing. The two-year yield dipped to 1.38 percent from 1.39 percent, and the 30-year yield held steady at 2.92 percent.
The Fed also said it expected to start winding down its massive holdings of bonds "relatively soon", cementing expectations of a September start.
The Fed has repeatedly said the weakness in inflation should be "transitory", and cited one-off explanations such as falling prices for mobile telephone plans and prescription drugs as factors. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.
Head of trading in Asia-Pacific Stephen Innes said that there may also be the possibility that the bank will start trimming its balance sheet in September. It shed 0.6 percent against the yen, 0.2 percent against the franc, 0.7 percent each against the euro and the pound for the day.
"The market is generally very bearish on the USA economy, the Fed, and on the US dollar", said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets. Her remarks lifted financial markets as investors interpreted her words to suggest that the Fed might slow its pace of rate increases.
Interest rate hikes are now going to take a back seat as the Federal Reserve turns its attention to reducing its balance sheet, bond guru Bill Gross told CNBC on Wednesday. The rate was raised a quarter point to 1.25 per cent on June 14, 2017.
Analysts saw little evidence of a shift in the Fed's monetary policy plans.
Investors will now be looking to Friday's preliminary second quarter growth estimates and next week's July non-farm payrolls report for more clues on the United States economy.