Stocks eased off session lows but still finished firmly in the red Wednesday after Federal Reserve Chair Janet Yellen suggested interest rate hikes would happen about six months after quantitative easing ends.
"The market is terrified of rising interest rates and any hint of them coming sooner than they think pushes it down the way it did," according to Dan Stecich Senior VP of economic research at Athena Advisor Services. "Ultimately, it should be a good thing for the markets as it means economy's doing well."
In its policy statement, the Fed said the benchmark federal-funds rate will remain near zero for a "considerable time" after its asset-purchase program ends. Yellen attempted to clarify the term, saying its is "hard to define" but "probably means something on the order of around six months."
"Assuming market participants anticipate QE ending in the fall, Yellen's comments could be interpreted as a rate increase in the spring of 2015," said Todd Salamone, director of research at Schaeffer's Investment Research. "That would be a negative in terms of timing because the general FOMC view is for a June 2015 rate hike and markets have been trading accordingly."
The central bank decided to cut its monthly asset bond purchase program by another $10 billion to $55 billion per month.
(Read more: Fed eases back the throttle, changes tune on rates)
Major U.S. Indexes
The Dow Jones Industrial Average slumped 114.02 points to close at 16,222.17, initially tumbling nearly 200 points after Yellen's rate hike comment. The blue-chip index had been trading in a lackluster 50-point range prior to the decision.
The declined 11.48 points to finish at 1,860.77. And the Nasdaq fell 25.71 points to end at 4,307.60.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended above 15.
The $10 billion reduction was largely in line with market expectations. The decisions passed on an 11-1 vote, with Narayana Kocherlokota voting against.
(Read more: Op-Ed: Yep, the Fed's new move is 'qualitative easing')
The Fed dropped the unemployment rate as its definitive yardstick for measuring the strength of the economy and emphasized it would rely on other factors in deciding when to boost interest rates.
"The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run," according to the Fed.
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Reiterating the Federal Open Market Committee's statement, Yellen said policy makers agree inflation will rise "gradually" toward the central bank's 2 percent target, despite recent readings well short of that objective.
Yellen also noted that the labor market has improved faster than had anticipated, though the economy still needs monetary support.
Among earnings, FedEx slipped after the shipping giant posted quarterly results that were below expectations, citing the severe winter weather. Its full-year forecast also fell short of consensus.
And Oracle declined after the software giant also missed Wall Street estimates and as investors were concerned about increasing competition and slower tech spending.
Jabil Circuit and Vera Bradley are among notable companies slated to post earnings after the closing bell.
JPMorgan will sell its physical commodities business to Swiss trade house Mercuria for approximately $3.5 billion, according to Reuters. JPMorgan said it sees no material impact on earnings as a result of the deal.
Toyota said it reached a $1.2 billion settlement with the Justice Department over its sudden acceleration problems.
First Solar spiked to lead the S&P 500 gainers after the solar company forecast 2015 revenue above expectations. Separately, First Solar and General Electric said they are developing a more cost effective photovoltaic power plant.
On the economic front, the U.S. current account deficit narrowed to $81.1 billion in the fourth quarter, dropping to a 14-year low, as exports hit a record high, according to the Commerce Department.
Major averages rose on Tuesday for a second consecutive day following upbeat data on the U.S. economy and after Vladimir Putin said Russia was not looking to divide Ukraine.
"In an environment where developed market governments are loathe to make policy decisions, investors have seemingly put more faith in financial markets," said Jack Ablin, chief investment officer at BMO Private Bank. "From a headlines perspective, troop buildups, the Russian annexation of Crimea and talk of the Cold War would have seemed to have set off a stock market selloff. Instead the S&P 500 has surged nearly two percentage points over the last two days, suggesting investors believe Crimea doesn't matter much."
On Wednesday, Vladimir Putin signed a treaty formally making Crimea part of the Russian Federation, but said he was not looking to take control of any other regions of Ukraine at a speech in front of parliament on Tuesday, helping to calm markets.
(Read more: Another Crimea? Ukraine's neighbor asks to join Russia)
Oil prices fell to around $106 a barrel, dipping to a six-week low, as concerns eased about an escalation of the Ukraine crisis and following a larger-than-expected gain in U.S. crude inventories.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
On Tap This Week:
WEDNESDAY: Earnings from Jabil Circuit, Vera Bradley
THURSDAY: Jobless claims, Philadelphia Fed survey, existing home sales, leading indicators, natural gas inventories; Earnings from Nike
FRIDAY: Quadruple Witching, 21st Century Fox shareholder mtg; Earnings from Darden Restaurants, Tiffany
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