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Stocks slump as Fed sticks with plan to trim stimulus 

The Dow fell almost 200 points on Wednesday in a sharp reaction to the Federal Reserve's decision to cut another $10 billion from its stimulus package that has buoyed markets in recent months.

The Fed decision to stick with its plan to continue to reduce its monthly bond purchases, now down to $65 billion, regardless of recent distress in emerging markets, was expected.

"Today's Fed decision to continue with tapering, despite the unfolding turmoil in emerging markets, suggests the Fed has a domestic policy compass firmly in hand. The Fed is sending a clear message that unless a much larger scale crisis emerges, do not expect the Fed to deviate from its current policy path," wrote Jonathan Lewis, chief investment officer at Samson Capital Advisors.

"We would not be surprised to see the Fed increase its tapering to $15 billion or 20 billion at one of its summer meetings, and expect the Fed to be done tapering by the fall should the economy continue on its current path," said Jennifer Vail, chief investment officer for institutional and corporate trust at U.S. Bank Wealth Management. 

The Dow Jones Industrial Average, which ended a five-day losing streak on Tuesday, initially dropped 215 points after the Fed announcement. But it rallied somewhat, before closing down 189 points, or 1.19 percent.

The S&P 500 lost 18 points and the Nasdaq declined 46.

The yield on the 10-year Treasury note fell to a low of 2.68 percent, its first time under 2.7 percent since Nov. 26. The CBOE Volatility Index (VIX), a measure of investor uncertainty, rose nearly 12 percent to 17.66.

"If they (Fed) had paused, they risked sending a signal to markets that they lacked conviction, were slaves to market rather than economic forces and/or were far more worried than the average investor, the latter of which could have caused a fair bit of panic among risk assets. So they did as was expected and at least judging by the initial market response – little – this was the best course of action," emailed Dan Greenhaus, chief market strategist at BTIG.

"The Fed would lose a lot of credibility if they blink over emerging markets. They have to act cool and collected by sticking to their plan of focusing on the U.S. economy. Looking ahead, it makes Janet Yellen's March press conference more interesting," said Peter Boockvar, chief market analyst at the Lindsey Group, of the next Fed chairman.

AT&T and Boeing both fell after issuing disappointing full-year forecasts. Yahoo slid as its online ad prices fell again in the fourth quarter.

"Earnings so far have been nothing to write home about, and it seems that no matter what, the market has found something imperfect even in the best of earnings," said JJ Kinahan, chief strategist at TD Ameritrade.

By mid-day, stock indexes had recouped about half of the losses that came on increasing worries about central bank and currency moves in emerging markets. "I think investors are getting comfortable with the idea that Turkey and Argentina are unlikely to change the outlook for U.S. stocks," said Greenhaus.

The dollar was steady against the currencies of major U.S. trading partners. Gold futures climbed $11.40, or 0.9 percent, to $1,262.20 an ounce and crude-oil futures declined 30 cents, or 0.3 percent, to $97.11 a barrel.

On Tuesday, stocks rallied, with the Dow rebounding after a five-session rout, as investors embraced better-than-expected quarterly earnings.