(Updates to after Fed decision)
* Fed lifts rates as expected
* Gasoline buildup takes down crude prices
* Treasury yields edge up
By Caroline Valetkevitch
NEW YORK, June 14 (Reuters) - U.S. stocks fell in volatile trading while the dollar pared losses on Wednesday after the Federal Reserve delivered a widely expected interest rate hike and announced it would begin cutting its huge holdings of bonds this year.
The U.S. central bank lifted the benchmark lending rate by a quarter percentage point and its policy-setting committee indicated the economy has been expanding moderately, according to a statement following a two-day meeting.
U.S. Treasury yields edged up but remained lower on the day, with the Fed sticking to its plan to raise rates again this year and detailing plans to reduce its $4.5 trillion balance sheet.
Traders said the Fed might not be able to hike later this year as forecast given weak inflation data. Data earlier Wednesday showed U.S. consumer prices unexpectedly fell in May, suggesting a softening in domestic demand.
"It just looks like the Fed is sticking to their story and the market remains highly skeptical that the Fed is going to be able to deliver just based upon underlying data. I would think that at some point the market is going to be pricing in even greater risks that the Fed might be moving too quickly," said Mark Cabana, head of U.S. short rates strategy at Bank of America Merrill Lynch in New York.
U.S. short-term interest rate futures pared earlier gains after the Fed's hike. Traders now see June next year as the earliest meeting at which the U.S. central bank will next lift its target for overnight borrowing costs, based on fed funds futures traded at CME Group as analyzed by Reuters.
The dollar index fell 0.11 percent, with the euro up 0.04 percent to $1.1219.
The Japanese yen strengthened 0.55 percent versus the greenback at 109.49 per dollar, while sterling was last trading at $1.2751, up 0.01 percent on the day.
The Dow Jones Industrial Average was down 9.3 points, or 0.04 percent, to 21,319.17, the S&P 500 lost 9.38 points, or 0.38 percent, to 2,430.97 and the Nasdaq Composite dropped 56.39 points, or 0.91 percent, to 6,163.98.
Benchmark 10-year U.S. Treasury notes were up 20/32 in price to yield 2.1377 percent, from 2.207 percent late on Tuesday.
The pan-European FTSEurofirst 300 index lost 0.35 percent and MSCI's gauge of stocks across the globe shed 0.24 percent.
Energy sector shares were the biggest drag on the S&P 500, tracking a slide in crude oil prices.
Oil prices tumbled after data showing an unexpectedly large buildup in gasoline stockpiles.
U.S. crude fell 3.7 percent to settle at $44.73 per barrel and Brent was last at $46.99, down 3.5 percent.
Gold rose after the weaker-than-expected U.S. data knocked the dollar.
Spot gold added 0.2 percent to $1,267.44 an ounce. U.S. gold futures gained 0.07 percent to $1,269.50 an ounce.
Copper lost 0.87 percent to $5,667.00 a tonne.
Additional reporting by Rodrigo Campos, Sam Forgione and Scott DiSavino in New York; Editing by Nick Zieminski and James Dalgleish