U.S. investors followed the lead of overseas stock markets, which fell sharply. Japan's Nikkei stock average was hit especially hard by the rising value of the yen, which will hurt the exporting sector. The dollar is at a 15-year low against the yen.
The Dow Jones industrial average fell nearly 200 points. Broader indexes fell about 2 percent.
The Fed said Tuesday it will start buying government bonds with money it gets from the maturing mortgage-backed bonds that it bought during the recession. The goal is to try to cut interest rates on mortgages and corporate loans, which in turn would increase borrowing and help the economy grow faster.
It could also drive the prices of Treasurys so high and their yields so low that they are no longer attractive investments, forcing traders to move into riskier assets that have the potential for bigger profits, like corporate debt and stocks.
The sell-off comes after the Fed took a much more cautious view of the recovery. In its statement at the conclusion of the meeting, the Fed said the recovery "has slowed in recent months." It reinforced comments from Chairman Ben Bernanke last month when he spooked the market by saying the pace of recovery was "unusually uncertain."
In morning trading, the Dow Jones industrial average dropped 199.42, or 1.9 percent, to 10,444.83. The Standard & Poor's 500 index fell 22.70, or 2 percent, to 1,098.36, while the Nasdaq composite index fell 53.34, or 2.3 percent, to 2,223.83.
The S&P 500 slipped below 1,100, a key technical and psychological level. Falling and holding below that level could add to anxieties and lead to more selling.
Just 249 stocks rose on the New York Stock Exchange compared with 2,512 that fell. Volume came to a light 113.3 million shares. Volume has been particularly light, even by summer standards in recent days as uncertainty about the economy led many investors to exit the market completely. Low volume also can exaggerate swings in the market.
The yield on the 10-year Treasury note, which moves opposite its price, fell to 2.70 percent from 2.77 percent late Tuesday. Interest rates are often set based on the yield of 10-year Treasurys.
The 10-year yield is at levels not touched since late March 2009 just weeks after recession worries sent the stock market to a 12-year low.
Britain's FTSE 100 fell 2 percent, Germany's DAX index dropped 2 percent, and France's CAC-40 fell 2.3 percent. Japan's Nikkei stock average dropped 2.7 percent.
Economic reports in recent months, including key measures on gross domestic product and employment, have pointed to a slowing recovery in the U.S. Opinions are mixed about whether the economy could fall back into recession. A report Wednesday showed the U.S. trade deficit widened in June to its highest level in 20 months as exports dipped. Falling exports are discouraging because they mean U.S. manufacturers could be slowing down. Early this year, manufacturing showed the most consistent signs of recovery.
Weak economic reports have also stood in contrast to upbeat earnings, which powered stocks higher throughout July. Strong earnings and optimistic outlooks from companies have continued in recent weeks.
Yet much of those profits have been driven higher because companies have slashed their work forces. That may not be sustainable.
A report earlier in the week showed that productivity dipped in the second quarter, meaning companies may have to start adding workers. That would be a boost to the economy, because more Americans would have jobs, but it could also slim profits for corporations.
On Wednesday, the healthy earnings reports continued to roll in.
Walt Disney Co. was helped by its ESPN television station and its movie studio, which produced hits like "Toy Story 3" during the quarter. Macy's Inc. raised its profit outlook as it carves out new market share against its rivals.
Macy's rose 44 cents, or 2.3 percent, to $19.82. Disney fell 90 cents, or 2.6 percent, to $34.39.
