Investors interpreted the Fed's decision as a signal that the global economy is weak. Bonds rose and oil fell, pushing down energy stocks. Financial stocks, which would benefit from higher rates, also dropped.
KEEPING SCORE: The Dow Jones industrial average dropped 279 points, or 1.7 percent, to 16,394 as of 2:17 p.m. Eastern time. The Standard & Poor's 500 fell 29 points, or 1.5 percent, to 1,960 and the Nasdaq composite declined 60 points, or 1.2 percent, to 4,833.
THE FED: The Federal Reserve decided Thursday to keep interest rates at record lows, citing low inflation, weakness in the global economy and unsettled financial markets. Investors appear to have interpreted the decision to mean that the Fed thinks the slowdown in China and other emerging markets is signaling a much weaker global economy. The Fed has kept its benchmark rate close to zero for almost seven years and some economists and investors had predicted that policymakers would lift rates by a quarter of a percentage point. The Fed meets again next month and in December.
THE QUOTE: "If growth in the strongest economy — the United States — isn't strong enough to raise rates even a quarter of point, what does that say about the prospects for global growth?" said Bill Strazzullo, chief strategist at market research firm Bell Curve Trading.
BUYING BONDS: Bonds in Europe rallied as investors sought safety, with Spanish, Italian and British 10-year notes all jumping. U.S. bonds also rose. The benchmark 10-year Treasury note gained, pushing down its yield to 2.14 percent.
TROUBLE HEAD: A mix of other factors may be feeding the selling, said UBS strategist Julian Emanuel. Several dozen House Republicans have said they won't vote for a funding bill that includes money for Planned Parenthood, raising the specter of another government shutdown. Worries about lackluster corporate earnings, which are expected to drop 4 percent in the third quarter from a year ago, are also weighing on the stock market.
FEAR INDEX: A gauge of investor fear, the VIX index, shot up 7 percent. The VIX, a measure of expected swings in stock prices, rose to 22, up from 12 in early July.
EUROPE SLUMPS: Germany's DAX was down 3.1 percent while the CAC-40 in France fell 2.6 percent. Britain's FTSE 100 was 1.6 percent lower.
BANK BLUES: JPMorgan Chase fell $1.75, or 2.8 percent, to $60.93 as investors judged that lower interest rates for longer mean banks won't be able charge more for loans. Citigroup slumped $1.13, or 2.2 percent, $50.50.
HOTEL HIT: La Quinta plunged $2.85, or 15 percent, to $16.82 after the hotel company announced late Thursday that its CEO Wayne Goldberg had stepped down after almost a decade in charge. The company also lowered its 2015 sales forecast due to weak demand in August and September.
CURRENCIES: The euro was down 0.8 percent at $1.1310. The dollar dropped against the Japanese yen, trading 0.5 percent lower at 119.83 yen.
METALS: The price of gold rose $20.80 to $1,137 an ounce. Silver climbed 17.9 cents to $15.16 an ounce and Copper fell 6.6 cents to $2.39 per pound.
OIL DOWN: The price of U.S. crude fell $2.22 to $44.68 a barrel. Brent crude, the main contract for international oils, rose 26 cents to $46.63.