By Herbert Lash

NEW YORK (Reuters) - U.S. stocks rose, then slumped while Treasury yields surged and then fell on Wednesday as markets reacted wildly to a bleak economic picture next year after the Federal Reserve adhered to a tough stance to fight inflation by jacking up interest rates.

The three main stock indices jolted up and down, the yield on benchmark 10-year Treasury notes spiked to 3.6401% and the dollar surged to a fresh two-decade high after the Fed raised rates by 75 basis points as expected.

The Fed also said in a statement following a two-day meeting of policymakers that it expects its policy rate to hit 4.4% by year's end and rise to 4.6% by the end of 2023.

The Fed's aggressive drive to lower inflation to its 2% target will take years and comes at a cost of slower growth and higher unemployment, according to projections from policymakers that cast doubt on market hopes for a "soft landing."

The projections show Americans are in for some pain as the U.S. central bank works to end inflation and prevent what Fed Chair Jerome Powell has said would otherwise be even worse outcomes.

"The Fed reset the expectations in order to eliminate counterproductive speculation by market participants of a pivot, for now," said Johan Grahn, head of ETFs at Allianz Investment Management LLC in Minneapolis.

"It's a logical action by a 'Volcker-courageous' Fed, but one that they can walk back at a later date if needed," Grahn said, referring to former Fed chief Paul Volcker, who tamed double-digit inflation four decades ago by inducing a recession.

Stocks on Wall Street tried to rally several times, without luck. After 10 years of abnormally low rates, investors have yet to figure out how to position their portfolios, said Carol Schleif, deputy chief investment officer at BMO family office in Minneapolis.

"It takes a while to anchor to the new normal," Schleif said. "Investors keep wanting to hear something more positive, and they weren't hearing that positive tilt they wanted."

Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Wellesley, Massachusetts, said the equity market was a little bit too optimistic that the Fed might soften its language.

After the the past four meetings of the Federal Open Market Committee, stocks rallied only to fall the following day.

"A lot of times you see (the market) do something on the day of and then something else the next day. Investors might want to reserve judgment until tomorrow," Hazen said, when stocks were trading higher on the day.