Asian shares dropped on Thursday and bonds rallied after a downbeat economic outlook from the United States Federal Reserve undermined recent market optimism and fueled expectations recovery would require even more stimulus measures.

After a slow start, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1.1 percent, potentially putting an end to a 10-session winning streak.

Japan's Nikkei slid 2.1 percent as the yen firmed, though Chinese blue chips managed to hold steady.  E-Mini futures for the S&P 500 fell 1.1 percent, while EURO STOXX 50 futures lost 2.2 percent and FTSE futures 1.6 percent. In a challenge to the stock market's recent optimism, the Fed predicted the US economy would shrink 6.5 percent in 2020 and unemployment would still be at 9.3 percent at year's end. Data released earlier had also shown core US consumer prices fell for a third straight month in May, the longest stretch of declines on record.

As a result, Fed Chair Jerome Powell said he was "not even thinking about thinking about raising rates". Instead, he emphasised recovery would be a long road and that policy would have to be proactive with rates near zero until at least 2022.

"While Powell did not commit to any new action at this time, his focus on downside risk and uncertainty reinforces the message that they will take further action, probably by September," was the take of economists at JPMorgan.

"Outcome or calendar-based guidance looks likely and Powell left the door open for moving to some form of interest rate caps."

Powell confirmed the Fed was studying yield curve control, a form of easing already employed by Japan and Australia.

All of which, saw yields on 10-year Treasuries fall 9 basis points on Wednesday, the biggest daily drop in almost two months. Yields were down at 0.71 percent on Thursday, a sharp rally from last week's peak of 0.96 percent.