U.S. stocks sank Thursday as investors weighed the potential economic costs of the Federal Reserve's ongoing fight with inflation.

The S&P 500 fell by 3.25% to 3,666.77, its lowest level since Dec. 2020. It also erased gains after rising 1.5% on Wednesday. The Nasdaq Composite plunged by more than 4%, bringing the index down by more than 30% for the year-to-date. The Dow sank by 741 points, or 2.4%, to close below 30,000 for the first time since January 2021.

Stocks, which moved initially to the upside following Fed's first 75 basis point rate hike since 1994 on Wednesday, turned around as traders assessed the potential that the central bank's moves to bring down inflation would trigger a deeper downturn in economic activity.

The Federal Open Market Committee's (FOMC) Summary of Economic Projections (SEP) on Thursday showed the committee itself now sees a less rosy economy ahead as its continues to hike interest rates. The FOMC now anticipates the unemployment rate will come in at 3.7% by the end of this year (versus the 3.5% rate seen in March), and that real gross domestic product will rise just 1.7% (versus the 2.8% increase seen previously). The Fed also raised its forecast for the rate of core inflation at year-end and its expectation for where the Fed funds rate would end 2022.

The lowered growth outlook coupled with a more aggressive path on interest rate hikes ahead appeared to vindicate some pundit's concerns that the Fed's window to achieve a "soft landing" had nearly or already passed. Fed Chair Jerome Powell suggested Wednesday that a 50 or 75 basis point interest rate hike seemed most like at the central bank's next meeting in July. While the Fed is still forecasting GDP growth will end each of 2022, 2023 and 2024 in positive territory, some suggested this may be overly optimistic.

"The Summary of Economic Projections (SEP) and Chair Powell’s presser highlighted a Committee that sees an increasingly narrow path to a soft landing, while still maintaining that as a baseline," Matthew Luzzetti, chief U.S. economist at Deutsche Bank, wrote in a note. "The statement removed the reference to maintaining a strong labor market as inflation is brought under control and the SEP anticipates that the unemployment rate will eventually rise by about half a percentage point. We continue to anticipate that the Fed will have to move more aggressively than signaled at [Wednesday's] meeting and that this tightening will trigger a recession in 2023 that leads to a more material rise in the unemployment rate."

Powell, for his part, said Wednesday that the Fed was not looking for a recession to achieve the central bank's goals of bringing down inflation. However, whether such an outcome is ultimately avoidable as a byproduct of the Fed's moves remains a question for markets, and one that will likely keep volatility at play, some strategists said.

"'Clear and convincing' evidence of moderating inflation has yet to materialize ... Further volatility is likely with the Fed firmly data dependent," Julian Emanuel, senior managing director at Evercore, said in a note. "Ideally, this will include equities reflecting signs of capitulation, the groundwork for 'a' bottom is being laid."

"Until further necessary and sufficient signs (gasoline price turn and VIX [spikes above 40] on heavy stock volume) of 'a' bottom, not necessarily 'the' bottom appear, we maintain balanced exposure," he added.

On the move

• Twitter (TWTR) shares turned lower Thursday afternoon, erasing earlier gains after Elon Musk's highly anticipated all-hands meeting with the social media company's employees. Musk reportedly discussed a goal of growing Twitter's user base to 1 billion users, and suggested both subscription and advertising sales would be key to the company's revenue growth going forward, Bloomberg reported, citing people familiar with the matter. However, he also reportedly did not directly address during the meeting whether he had committed to completing his acquisition of the firm.

• Robinhood (HOOD) shares fell anew on Thursday amid the recent drop in cryptocurrency prices, and as Wall Street firms struck an increasingly pessimistic tone on the online trading platform's stock on increased regulatory concerns. Atlantic Equities downgraded the stock to Underweight from Neutral on Wednesday and slashed its price target to the lowest on Wall Street at $5 a share, Bloomberg data showed.

• Adobe (ADBE) shares declined before the company's fiscal second quarter earnings report, which is set for release Thursday after market close. Consensus analysts see the software company delivering adjusted earnings of $3.31 per share on revenue of $4.35 billion.

This post will be updated.

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter.

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