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, or 0.4 percent, to 1,413.38. The Nasdaq composite index dropped 6.1, or 0.2 percent, to 3,113.57.
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. For that to happen, the economy would have to weaken significantly.
The minutes didn't even address the logistics of more bond buying, noted John Canally, economist for LPL Financial.
"There was nothing in the minutes about it," Canally said. That probably troubles traders of stocks and bonds who anticipate more action from the Fed, he said.
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 to 2.28 percent from 2.16 percent earlier Tuesday.
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 are confident that there will be a buyer to keep demand strong later on.
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 3.42 percent from 3.32 percent before the Fed minutes.
— Gold fell $38 an ounce to $1,642. The selling started shortly before the Fed minutes were released. Gold had been unchanged for most of the morning.
Metals prices dropped because the Fed hinted that it's less likely to tighten its monetary policy some analysts said. Easy monetary policy — and the accompanying low interest rates — usually boost gold prices because traders don't get great returns on other investments, said James Steel, an analyst at HSBC.
— 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 closed 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 after three of the best months for the labor market since the recession. 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.
— 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.