The Federal Reserve did what investors expected -- it said it would buy Treasury bonds to help the economy. Stocks then plunged because investors saw a grim forecast behind the Fed's plans.
The Fed said Wednesday it would buy long-term Treasurys and sell short-term ones to help the economy regain momentum. It surprised investors when it said it would include more 30-year bonds in its purchases than expected. This is the third major bond-buying program by the Fed in less than three years.
Financial analysts said stocks dropped as investors came to the conclusion that the Fed expects the economy to take years to recover.
The major indexes fluctuated as they often do after major Fed announcements. The losses accelerated in the last hour of trading.
The Dow Jones industrial average lost 283.82 points, or 2.49 percent, and closed at 11,124.84. The Standard & Poor's 500 index fell 35.33, or 2.94 percent, to 1,166.76 The Nasdaq composite fell 52.05, or 2.01 percent, to 2,538.19.
The yield on the 10-year Treasury note fell to a record low of 1.86 percent from late Tuesday's 1.93 percent.
Wednesday's trading recalled the sharp losses the market has suffered this summer as investors feared that the country was heading toward another recession.
The Fed had some bleak remarks about the state of the economy in the statement that accompanied its decision to buy more bonds. The Fed said the economy has "significant downside risks."
One of those risks is the volatility in financial markets around the world. It also listed a number of problems that won't be easily solved: high unemployment, a depressed housing market and consumer spending that is growing only at a slow pace. There are also concerns about problems overseas, including the debt crisis in Europe. -- AP