U.S. equities closed lower on Wednesday after the Federal Reserve kept interest rates unchanged, while worries surrounding the presidential election weighed on investor sentiment.
"There's no surprises here. This meeting was about setting the mood music ahead of the December meeting. All the signs now point to a hike in December. The labour market is doing well, inflation is creeping up and growth is good," Luke Bartholomew, fixed income investment manager at Aberdeen Asset Management.
"However, there's the small matter of the US election to navigate in between now and the US Federal Reserve's next meeting. That's why the statement carries enough room for the Fed to wriggle out come December if economic and financial conditions change," he said.
The Dow Jones industrial average briefly fell 100 points after the decision, before closing about 75 points lower. The index also closed below 18,000 for the first time since July 7. The S&P 500 fell 0.65 percent, posted a seven-day losing streak and closed below 2,100, with utilities and real estate falling more than 1 percent to lead decliners.
The Nasdaq composite dropped about 0.93 percent and briefly fell more than 1 percent. Earlier, the three major indexes broke above the flatline before retreating.
With financial markets anticipating a rate hike before the end of the year, the Federal Reserve held interest rates steady again while continuing to acknowledge that the case for a move is getting stronger.
"What they'd like to think they're doing is ensure the environment stays the same for December," said Robert Tipp, chief investment strategist at Prudential Fixed Income. But the election could change that environment, he said.
Federal Open Market Committee officials, however, made no direct nod to a coming rate increase at the December meeting, a move that the market is strongly anticipating. In fact, the dovish FOMC majority gained a vote.
The group in lieu of a rate hike released a statement acknowledging economic improvements that aren't yet enough to generate a policy tightening.
"My main takeaway is that the Fed is keeping its options open, which seems to be different from the market's initial reaction. I lean toward the FOMC not raising rates in December," said Jason Thomas, chief economist at AssetMark.
"I still think that the election is the bigger fear in the market than the Fed, but the fact that [Boston Fed President Eric] Rosengren didn't dissent does in fact point to a December move," said Quincy Krosby, market strategist at Prudential Financial. "But the market may be wondering if there's enough evidence of a stronger economy to warrant a rate hike versus a belief that Chair Yellen needs to replenish her tool kit in the event of a weakening economic backdrop."
Rosengren was one of three dissenters at the Fed's previous meeting, along with Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester, favoring a rate hike.
Investors also watched out for new development on the U.S. presidential election front. In less than a week, what seemed like a sure victory for Democratic nominee Hillary Clinton has turned into a tighter race, with Republican nominee Donald Trump's polling numbers spiking after a letter said the FBI was looking into new emails related to Clinton. Financial markets around the world had largely been pricing in a Clinton victory before the letter had been released.
"If Clinton had a bigger lead, I think the Fed would feel more comfortable raising rates today," said Adam Sarhan, CEO at Sarhan Capital.
"Investors are jittery. The [Mexican] peso slid nearly two percent since last Friday and market volatility has spiked," said Jack Ablin, chief investment officer at BMO Private Bank. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded about 4.5 percent higher, near 19.4. The so-called fear gauge has also risen more than 16 percent this week.
In economic news, ADP said the U.S. economy created less jobs than expected in October, adding 147,000 jobs. ADP's report serves as a preview for the government's monthly nonfarm payrolls report, slated for release Friday at 8:30 a.m. ET. With the Fed front and center, economic data has taken a larger importance within market participants, as the central bank has consistently said it depends on it to determine its monetary policy course.
Stocks saw sharp moves on Tuesday, breaking below key technical levels as investors got jittery about the Fed and the election. This is "a market of uncertainties," said Peter Cardillo, chief market economist at First Standard Financial. "Investors now are really focusing on the post election; in other words, a contested election, which could take months."
"The S&P closed below support for the first time since February. You've had this underlying bid in the market, where buyers show up and defend support. Yesterday, buyers didn't show up," said Sarhan. The Dow and the S&P briefly broke below 18,000 and 2,100, respectively.
U.S. Treasurys were higher on Wednesday, with the two-year note yield lower at 0.81 percent and the benchmark 10-year yield also lower, around 1.80 percent. The U.S. dollar fell against a basket of currencies, with the euro near $1.109 and the around 103.4.
In oil markets, U.S. crude prices sank 2.85 percent to settle at $45.34 per barrel after the Energy Information Administration reported a crude stockpile build of 14.4 million barrels, the largest increase on record.
The dropped 13.78 points, or 0.65 percent, to close at 2,097.94, with real estate leading all 11 sectors lower.
The Nasdaq slipped 48.01 points, or 0.93 percent, to end at 5,105.57.
About three stocks declined for every advancer at the New York Stock Exchange, with an exchange volume of 984.64 million and a composite volume of 4.177 billion at the close.
Gold futures for December delivery rose $20.20 to settle at $1,308.20 per ounce.
—CNBC's Jeff Cox contributed to this report.
On tap this week:
Earnings: Facebook, AIG, Qualcomm, MetLife, Allstate, Continental Resources, Avis Budget, 21st Century Fox, Allergan, Time Warner, Anthem, Clorox, Alibaba, Fitbit, Estee Lauder, Delphi Automotive, TransCanada, Zoetis, Yelp, NY Times, Och-Ziff Capial Management, Kate Spade, Whole Foods, TransOcean, Plains All American, Marathon Oil, First Solar, La Quinta, Red Robin Gourmet Burgers, LPL Financial
2:00 p.m. FOMC statement
Earnings: Kraft Heinz, CBS, Starbucks, Las Vegas Sands, Activision Blizzard, Credit Suisse, Cigna, Encana, Adidas, AMC Networks, Church and Dwight, Chesapeake Energy, Fortress Investments, S&P Global, Scotts Miracle-Gro, Hyatt, Pinnacle West, Time Inc,G FireEye, GoPro, Fossil, Ambac, Twilio, Weight Watchers, Noodles and Co, Lions Gate, TrueCar, TiVo, Skyworks, El Pollo Loco
8:30 a.m. Initial claims
8:30 a.m. Productivity and costs
9:45 a.m. Services PMI
10:00 a.m. ISM nonmanufacturing
10:00 a.m. Factory orders
8:30 a.m. Employment report
8:30 a.m. International trade
4:00 p.m. Fed Vice Chairman Stanley Fischer at IMF on policy changes after great recession