The losses are starting to pile up. The S&P 500 is down 9.8% from its previous all-time high, close to correction territory. The Russell 2000 Index of small cap stocks fell 2.3% to 1931.29, leaving it down more than 20% from its previous peak, which is shorthand for a bear market.

The range between Thursday’s highs and lows was not as wide as in other sessions of the week, but it continued a series of erratic trades. The VIX, a measure of expected volatility, hit its highest level in a year on Wednesday. Markets were rocked by concerns over central bank policy on interest rates and inflation, and geopolitical tensions over Russia.

The volatility reflects the difficulties investors are having not only in responding to the Federal Reserve’s monetary policy plans, but also in preparing to live with what will be a long-term shift in that policy, Yung-Yu Ma said, Chief Investment Strategist at BMO Wealth Management.

“What is considered and when is difficult at this stage,” he said. If inflation comes down quickly on its own, that will release some pressure. If it doesn’t, and the Fed needs to be aggressive in fighting it, “it’s going to wreak havoc on the market.”

For many traders, the question is not what the Fed will do, said David Bahnsen, chief investment officer at Bahnsen Group, but what other traders think it will do and how to place bets that benefit from it. The result, he said, is a market full of leveraged trades that will need to be unwound quickly if they don’t pay off.

“There is no lesson to be learned from all of this,” he said. “It’s all a game. But that exacerbates volatility.

Statements from the Fed on Wednesday added to that. The central bank signaled it would start raising interest rates in mid-March as generally expected, but investors were struck by President Jerome Powell’s hawkish tone at his press conference, repeatedly stressing the bank’s intention to fight inflation. This caused a strong sell-off in the market.

The issue of inflation is important, said Mark Grant, strategist at B. Riley Securities, but the Fed hasn’t provided enough guidance to the market on exactly how it plans to fight inflation.

“This continued uncertainty with the Fed is overshadowing the economy,” he said. “Everyone is sitting around trying to figure out what to do.”

The latest economic reports have brought good news. The economy grew at an annualized rate of 6.9% last quarter, the biggest one-year jump since 1984. Economists had forecast growth of 5.5%, propelled by consumer spending, business investment companies and stock replenishment efforts. Separately, weekly jobless claims fell 30,000, the latest sign of a healthy job market.

As economic issues eclipse it, earnings season continues and is seen as the next big test of whether sky-high stock market valuations can be justified.

McDonald’s fell 0.4% to $248.74 after the company missed analysts’ earnings estimates despite rising sales. Blackstone rose 6.8% to $119.04 after reporting its net income had nearly doubled. Mastercard rose 1.7% to $350.53 even after it said operating expenses jumped.

“What I’m looking for in this earnings season is inflationary pressures and margins, if companies are able to hold onto earnings,” said Fahad Kamal, chief investment officer at Kleinwort Hambros. “Are they able to pass on prices, are they able to maintain pricing power?” As central banks limit liquidity, maintaining profit margins is particularly important, he added.

The yield on the benchmark 10-year Treasury fell to 1.807% on Thursday from 1.845%. Short-term government bonds continued to sell, with the two-year Treasury yield hitting 1.19%.

The greenback strengthened, with the WSJ Dollar Index hitting its highest level since July 2020. Precious metals fell, with gold down 2% at $1,793.30.

“Yields in the US have been rising as the trajectory of rate hikes increases. There is also a safe haven play mixed in there, it will be a supportive environment for the dollar,” Kamal said. .

Netflix rose 7.5% to $386.70 after billionaire investor William Ackman said his hedge fund bought 3.1 million shares. Moderna fell 4.1% to $148.62 after the company said it began testing a version of its modified Covid-19 vaccine to target the Omicron variant.

Teradyne,

an equipment maker, fell 22% to $111.24 after its earnings forecast missed analysts’ expectations. Records showed company insiders have sold thousands of shares in recent days. Software company ServiceNow rose 9.1% to $528.69 after beating Wall Street earnings estimates.

Oil prices have fallen. U.S. crude fell 0.85% to $86.61 after hitting a new seven-year high. Falling stocks have pushed up prices, according to Nordic bank SEB.

The Stoxx Europe 600 gained 0.7%, reversing direction after falling slightly. Earlier, Asia-Pacific indices fell sharply, with gauges in China, Japan and South Korea hitting their lowest closing levels in more than a year.

Cryptocurrencies fell as bitcoin extended its decline into a third day to trade around $35,700. Metaplatforms,

formerly known as Facebook, is ending plans to build a cryptocurrency payment network and selling its technology to a small bank, the Wall Street Journal reported.

—Megumi Fujikawa, Suryatapa Bhattacharya, and Quentin Webb contributed to this article.

Write to Paul Vigna at Paul.Vigna@wsj.com and Anna Hirtenstein at anna.hirtenstein@wsj.com