Bonds sold off as traders read the Fed's new interest rate forecasts as slightly more aggressive, but dovish comments from Fed Chair Janet Yellen and the central bank's statement drove stocks higher.
The Fed retained two key pieces of language in its statement, released after its meeting Wednesday. Both a line about leaving rates low for a "considerable time" and another phrase about "significant underutilization of labor resources" were included, and both were the subject of much Wall Street speculation ahead of the meeting.
Read More Yellen stands by 'considerable time' assessment
"Bonds, gold, the U.S. dollar all heard hawkishness. All three markets have a different interpretation than the stock market. The dollar is ripping here," said Peter Boockvar, chief market analyst at Lindsey Group. The dollar index was more than a half percent higher, while the Dow (Dow Jones Global Indexes: .DJI) was slightly higher, pushing into record territory.
Fed officials also lowered growth forecasts for 2014 to 2016. This year's growth level fell to 2 to 2.2 percent form 2.1 to 2.3 percent, and the central tendency for GDP growth was reduced in 2015 to 2.6 to 3 percent from 3 to 3.2 percent.
The Fed sees higher growth next year, but its outlook then trails off after that. The forecast was for 2.5 to 3 percent for 2016. but that was reduced to 2.4 to 2.5 percent, and the central bank sees an even slower pace of growth in 2017-2 to 2.3 percent.
The central bank slightly changed its forecasts for rate hikes-seen as slightly more hawkish by some traders. For the end of next year, the median projections for the fed funds rate was 1.375 percent compared with 1.125 percent in June, and the projection for the end of 2016 moved up to 2.875 percent from 2.50 percent.
"Take them with a grain of salt," said Diane Swonk, chief economist at Mesirow Financial. "If you want to make a point as an outlier, that's where you make it. That's why they don't label the dots as which ones are voting and which ones aren't."
Read More Live Blog: Yellen stands by consdierable time
Bonds retraced slightly across the curve while Yellen spoke to the media, a half hour after the Fed statement and projections were released. "Her words were more dovish than what one might have interpreted from the FOMC statement," said David Ader, chief Treasury strategist at CRT Capital.
Yellen, during her presser, said the market's views and the Fed's views were not that far apart, in direct contrast with the findings of a recent San Francisco Fed paper that stirred up markets.