The Dow Jones industrial average was down as much as 133 points after the Fed released minutes of the March meeting of its Open Market Committee, which sets interest rates and monetary policy. It had been down 45 points before the minutes were released.
The Dow bounced back by the close to a decline of 64.94 points, or 0.5 percent, at 13,199.55. The Standard & Poor's 500 index fell 5.66 points to 1,413.38.
The Nasdaq composite index dropped 6.13 to 3,113.57. It was the fifth loss for the Nasdaq in six trading sessions, but the index remains up almost 20 percent for the year, compared with 12 percent for the S&P.
Utility stocks barely rose. The other nine industry groups that make up the S&P 500 fell, led by energy stocks, which declined about 1 percent as a group.
The Fed minutes showed that policymakers fear hiring could slow if economic growth doesn't improve. The country added an average of 245,000 jobs per month from December through February, the strongest three months since the Great Recession.
Only two of 10 voting committee members on the Fed committee said they would support another round of bond purchases, and only if the economy weakened significantly.
The minutes did not address the logistics of more bond-buying, troubling traders of stocks and bonds who anticipate more action from the Fed, said John Canally, an economist for LPL Financial.
The release of the minutes reduced demand for government bonds, driving prices down and yields up. The yield on the benchmark 10-year Treasury note rose to 2.31 percent from 2.16 percent earlier Tuesday. That was its highest since March 20.
The Fed has embarked on two previous rounds of bond-buying, most recently in August 2010, to drive down long-term interest rates. Low bond yields generally encourage profit-hungry investors to buy stocks.
When it appears that bond-buying is unlikely, demand for Treasurys tends to fall. That's because the Fed is the biggest player in the market for U.S. government debt. Traders try to front-run the Fed by buying bonds because they believe demand will be strong later.
Among the ripples in the financial markets after the Fed's announcement:
-- The sell-off in Treasurys was broad. The price of the 30-year Treasury bond fell $2.53 per $100 invested, pushing its yield up to 3.44 percent from 3.32 percent before the Fed minutes.
-- Gold fell $38 an ounce to $1,642 after trading almost unchanged earlier. The Fed minutes suggested inflation is under control, and traders sometimes buy gold as a hedge when they worry about inflation, driving the price up.
-- The dollar rose against the euro, also after being virtually unchanged for most of the day. The euro was down 1.1 cents against the dollar to $1.322 in afternoon trading. Speculation that the Fed won't act typically helps the dollar. When the Fed buys bonds and other debt securities to keep rates low, that limits the returns available to investors who hold the dollar.
Many traders were in wait-and-see mode all morning before the Fed minutes were released. Stocks drifted lower despite solid reports on auto sales and factory activity.
Orders to factories bounced back by a solid 1.3 percent in February as businesses made more long-term investments, the Commerce Department said after the market opened.
The news bolstered earlier signals that U.S. consumers are feeling confident enough in the economy to buy higher-cost items like cars after years of putting off major purchases.
Chrysler said earlier that sales of its vehicles spiked by one-third last month, making March its best month in four years. Sales were helped by the introduction of small cars from the company's Fiat brand. Ford's sales rose 5 percent, General Motors' by 12 percent.
The afternoon selling doused any enthusiasm the market carried into the week after it closed its best first quarter in more than a decade. The Dow and S&P both finished at multi-year highs Monday.
Trading volumes have been light for about two weeks in part because there has been relatively little news to move markets. Many companies are quiet ahead of earnings season, which begins in earnest next week.
The government will release its March jobs report on Friday. Economists expect that hiring slowed modestly last month. The report's impact on the market might be muted because markets will be closed for the beginning of Easter weekend.
In corporate news:
-- Molson Coors Brewing Co. fell 5.4 percent after the company made a major investment overseas, putting up more than $3.5 billion to snap up StarBev and its nine breweries in central and eastern Europe.
-- Investment bank Morgan Stanley fell 2.2 percent after the Federal Reserve said a mortgage division had abused consumers in the foreclosure process. Morgan Stanley has since sold the division, Saxon Mortgage Services Inc., to Ocwen Financial Corp.
-- Home products retailer Conn's Inc. surged 15.5 percent after it beat analysts' profit forecasts in the fourth quarter and boosted its earnings guidance for the upcoming year.
-- Express Scripts Inc. gained another 3.9 percent a day after completing its $29.1 billion acquisition of Medco Health Solutions, forming the largest pharmacy benefits manager in the country. The stock is up 6.4 percent this week.
Daniel Wagner can be reached at www.twitter.com/wagnerreports.
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