Stocks around the world dropped sharply Thursday after the U.S. Federal Reserve acknowledged a day earlier that the economy won’t improve any time soon.

Stock averages in Japan, South Korea and Australia dropped more than 2 percent Thursday, and stocks in Hong Kong and Europe fell even more, closer to 5 percent. France’s main index, the CAC, tumbled 5.4 percent.

By noon in New York, the Dow Jones industrial average was down 3.8 percent, or 425 points, on the heels of Wednesday’s 283-point loss. (Update: At the closing bell, the Dow was off 391.01 points, or 3.5 percent of its value.)

The Fed on Wednesday said it would move around $400 billion of its own holdings in an effort to reduce interest rates on long-term loans, making investors fearful that it had depleted all other options for stimulating economic growth. –BF

The Associated Press:

In New York, stocks fell sharply even though the New York Stock Exchange executed a rule designed to smooth trading.

The exchange invoked Rule 48, which limits how much information is released about stock trades. It is only used on days when extreme volatility is expected in the stock market.

Stock volatility jumped. The VIX, an index that measures investor fear, rose 7.2 percent to an index level of 40, well above the index’s average level. It’s common for stocks to move dramatically after the Fed makes a big announcement. But the number of trades that can be made instantly has also gone up in recent years, causing big swings to happen more quickly.

“These major moves are much more compressed, time-wise, than in the past,” said Landesman. “A 5 percent move can now happen in a couple of minutes as opposed to a week or two.”

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