Volatility gripped Wall Street as traders watched for signs of a potential escalation of the Middle East conflict, as well as Jerome Powell's remarks for clues on the policy outlook.

The S&P 500 fell for the third time in a row after a series of twists and turns. Drones attacked a US base in Syria, while a US destroyer intercepted cruise missiles and drones in Yemen, causing minor injuries but raising new concerns that Israel's war with Hamas could spark a wider conflict. Tesla Inc. fell more than 9% after reporting disappointing earnings.

Treasury 10-year yields approached 5%, while two-year rates fell after Powell said the Fed will proceed with rate hikes cautiously, citing evidence that policy isn't "too tight." Swaps reduced the implied odds of another Fed rate hike to just under 50% and priced in the start of rate cuts in July, rather than September previously.

Despite rapid and steep interest-rate hikes over the last 18 months, Fed Bank of Chicago President Austan Goolsbee is optimistic that the United States will avoid a recession. He emphasized the importance of the Fed keeping inflation on track to reach its 2% target and keeping inflation expectations stable.