Concerns emerged after the Labor Department reported its consumer price index had a bigger-than-expected jump for November, with large increases in the cost of clothing, airline tickets and prescription drugs. That raised questions about the Fed's options for priming the economy.
Policymakers this week lowered interest rates and announced a plan to align with other key central banks and offer loans to pressed lenders around the world. But while it wants to stimulate the U.S. economy and make lending easier among banks wary of faltering debt, the Fed also has to keep a watchful eye on inflation.
Robert Dye, senior economist at PNC Financial Services Group, said the economic readings this week painted a mixed picture for investors, spurring some of the market's volatility.
"If you take the stronger-than-expected economic data we saw this week in the form of retail sales and add to that the inflation data and then combine that with a somewhat ambiguous statement from the Fed, you get a picture as clear as mud," he said.
The uncertainty weighed on the markets Friday, a day after stocks finished mixed. The Dow Jones industrial average fell 178.11, or 1.32 percent, to 13,339.85.
Broader stock indicators also fell. The Standard & Poor's 500 index dropped 20.46, or 1.37 percent, to 1,467.95, and the Nasdaq composite index fell 32.75, or 1.23 percent, to 2,635.74.
It resulted in Wall Street's worst weekly showing in a month. For the week, the Dow tumbled 2.10 percent, while the S&P 500 declined 2.44 percent and the Nasdaq shed 2.60 percent.
Bond prices fell for the third straight day. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 4.24 percent from 4.21 percent late Thursday. The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude dropped 98 cents to $91.27 per barrel on the New York Mercantile Exchange.
Friday's report on inflation follows a reading Thursday that showed the biggest jump in inflation at the wholesale level in 34 years.
The 0.8 percent increase in consumer prices topped the 0.6 percent rise economists had been expecting. The report also showed so-called core inflation, which excludes often-volatile food and energy prices, had its biggest increase in 10 months, rising 0.3 percent.
