Stocks slide, erasing Wednesday’s big gains, as volatility continues to reign.

Stocks dove on Thursday, erasing gains from their best day since 2020 in a swing that highlights Wall Street’s heightened anxiety over what the Federal Reserve’s campaign to slow inflation will mean for the economy.

The S&P 500 fell 3.6 percent, after surging 3 percent on Wednesday. The Nasdaq composite slid 5 percent, its biggest drop since June 2020.

The volatility was on display in other financial markets, too. Yields on government bonds spiked, with the rate on 10-year U.S. Treasury notes, a benchmark for borrowing costs across the economy, climbing above 3 percent and touching its highest level since 2018, reversing a drop on Wednesday.

The stock market’s gyrations, which have become more dramatic than usual, show that the debate over the fate of the economy is far from settled. Investors are worried that the combination of rising prices and rising interest rates will hit consumer spending, corporate profits and economic growth. In between bouts of panic, glimmers of good news like upbeat corporate earnings reports or reassuring economic data have resulted in big rallies.

“The highly uncertain economic, inflation and interest rate outlook is driving the more frequent, large swings in investor sentiment in both the stock and bond markets,” said Kathy Bostjancic, the chief U.S. financial economist at Oxford Economics.

Stocks soared on Wednesday after the Fed chair, Jerome H. Powell, assured investors during a news conference that policymakers weren’t considering extraordinarily large increases in interest rates — specifically ruling out a 0.75 percentage-point jump that some analysts had started to predict. The Fed did raise its benchmark rate by half a percentage point, but that increase was widely expected.

Thursday’s decline erased that gain, but stocks were still slightly higher for the week and a touch above their lowest point of the year, reached last Friday.

Still, Thursday’s drop was an acknowledgment from investors that while the Fed might not go as far as raising interest rates by three-quarters of a percent in one day, it is quickly withdrawing support for the economy. The central bank also plans to shrink its nearly $9 trillion bond holdings, a move that could directly affect financial markets.

The Fed is aiming to dampen demand and cool off price gains that are now at their fastest in over four decades after initially labeling inflation a “transitory” result of the reopening of the economy from a year of lockdowns and restrictions. The Fed’s shift in tone has made investors rethink their appetite for risky investments, like stocks.

“Investors have watched the Fed move from its theory that inflation would be transitory to one of considerable concern about its potential duration and toll on the economy,” said Scott Knapp, the chief market strategist at CUNA Mutual Group said.

The Fed has acknowledged that some factors behind rising prices are out of its reach, namely Russia’s invasion of Ukraine, which has pushed energy prices higher, and China’s recent Covid lockdown, which could further disrupt an already unsteady supply chain. Mr. Powell said on Wednesday that lowering inflation without causing a recession — what economists refer to as a “soft landing” — would be difficult.

“I do expect that this will be very challenging; it’s not going to be easy,” Mr. Powell said, though he did express optimism that the Fed could achieve it.

“The Fed’s confidence in a soft landing and commitment to not exceed a rate hike of 50 basis points was not enough to offset the sobering reality that a fast tightening cycle is usually a tough environment for stocks,” said Lindsey Bell, the chief money and markets strategist at Ally Financial. “The trajectory of inflation remains unclear.”

Many companies have pinned rising prices on rising labor costs, and economists worry that high inflation may become more permanent if wages continue to rise quickly. Fresh data released on Thursday showed just how much those costs are rising, with weaker productivity and stronger compensation leading to an 11.6 percent increase in unit labor costs, or how much a company spends on labor for each item of goods it produces, the Labor Department reported.

“Today’s data was startling and very inflationary, suggesting that the good intentions communicated yesterday are unlikely to be realized,” Mr. Knapp said.

But investors are also about to get two more widely watched updates on the economy. The Labor Department will publish its monthly report on hiring on Friday, and economists surveyed by Bloomberg expect it to say that 380,000 jobs were created last month, a slight deceleration from March but still a strong showing for the economy.

The government will also release its latest update of the Consumer Price Index next Wednesday. In the year through March, that measure of inflation rose 8.5 percent, its fastest pace since 1981.

The data and shifting expectations about the economy are fueling bigger swings in stock prices than investors have seen since 2020, a year in which the coronavirus pandemic and the U.S. presidential election whipsawed financial markets. So far this year, the S&P 500 has gained or lost more than 2.5 percent on seven separate days, all of them in March, April and May. In 2021, there was only one day in which stocks rose or fell by that much, in late January of that year.

The bond market, too, has seen prices gyrate. Yields on 10-year notes have surged from about 1.6 percent at the start of the year to more than 3 percent now, but not without sharp drops as it went.

It’s all a reflection of how unsure investors are about what will happen next, said Ms. Bostjancic of Oxford Economics.

The main question, she said, is: “Will the Fed inadvertently engineer a hard landing or manage to bring about the coveted soft landing?”