On Thursday, the US core consumer price index for September came in at 2.2 per cent. The Russell 2000 index of smaller-company stocks fell 10 points, or 0.6 percent, to 1,565.
The yield on the 10-year U.S. Treasury note has risen to around 3.1 percent from around 2.1 percent over the past year.
On Wednesday, the Dow fell by more than 800 points, its worst drop in eight months.
"There are a number of worries for investors right now, from the pace of rising bond yields and the impact on investor sentiment, to Italy's populist coalition playing a game of chicken with the European Commission, stalling Brexit negotiations and the ongoing trade conflict between the U.S. and China", said Craig Erlam, senior market analyst at Oanda trading group. U.S. President Donald Trump commented the Fed has "gone crazy" and "is making a huge mistake", on Wednesday.
"It is a correction that I think it is caused by the Federal Reserve with interest rates", Mr Trump told reporters at the White House.
"If you're going be anxious about a White House that was going to try to politicize the Fed, then you can think of other people that they might put there besides the people that we choose", Kevin Hassett, chairman of the White House's Council of Economic Advisers, said at the Council on Foreign Relations on October 9.
Critics said it was convenient for Trump to blame the Fed when really his trade war with China- which is harming the global economy and raising prices for ordinary Americans - is to blame.
At IMF meetings in Bali, Lagarde said she "would not associate" Fed chair Jerome Powell "with craziness".
President Trump took aim at the Federal Reserve this week, saying the USA central bank had "gone crazy" by raising interest rates too quickly, sparking backlash among prominent leaders in the business and economic communities.
The rout caused a domino effect worldwide, with losses spreading to Asia and Europe on Thursday as investors remained concerned about rising rates - which would send more buyers out of equities and into bonds - as well as the impact of Trump's trade conflict with China on corporate profits.
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White House economic adviser Larry Kudlow on Thursday said Trump's opinions had no weight on the Fed's actions.
Trump on Thursday also indicated that the Fed's policies were harming him personally. "That suggests the Fed will keep raising rates, and that's taking the wind out of the stocks that have done the most, particularly in the tech sector".
Trump has repeatedly touted Wall Street records as proof of the success of his economic programme, including his confrontational trade strategy.
Trump previously criticized the Fed for allowing too much money into the economy in several tweets from 2011, before he became the president. But the remarks are a sharp departure from Trump's recent predecessors.
Under the guidance of Powell, Trump's pick to lead the central bank, and his predecessor Janet Yellen, Fed officials have raised rates six times since Trump's inauguration in January 2017.
In the face of the repeated attacks, Mr Powell said central bankers did not pay attention and are "quite removed from the political process".
In fact, I think we should all be grateful that when Congress created the Fed in 1913, it made the Fed independent of the federal government, not part of it.
'And we just try to do the right thing for the medium and longer term for the country'.
The selloff came a day after the International Monetary Fund said the world economy is plateauing and cut its growth forecast for the first time in more than two years, blaming escalating trade tensions and stresses in emerging markets.