The Dow Jones Industrial Average closed down 785.91 points, or 2.94 percent, while the S&P 500 dropped 2.81 percent and the Nasdaq composite slid 2.99 percent as the Fed cut rates by half of a percentage point.
Fed Chairman Jerome Powell said the "coronavirus poses evolving risks to economic activity," although the fundamentals of the U.S. economy remain strong.
Stocks had bounced back on Monday, with the Dow surging nearly 1,300 points after all three major markets entered correction territory last week.
The rate cut came after G7 nations issued a statement declaring they would use policy tools to combat an economic slowdown due to the virus.
In response to the cut, investors turned to U.S. Treasurys and the benchmark 10-year Treasury yield hit a record low of 0.906 percent, causing bank stocks to decline. Bank of America fell 5.5 percent, while JPMorgan Chase and Citigroup each dropped 3.8 percent.
Some of the biggest losers on the day were American Express, which lost 5.24 percent; 3M, which dropped 5.09 percent, and Microsoft, which fell 4.79 percent.
More than 100 cases of the virus have been confirmed in the United States, and a slate of major events, including Facebook's annual F8 developer conference, Google's News Initiative Global Summit and the Game Developers Conference have been canceled because of concerns that the virus will spread.
American Airlines stock fell 5.36 percent and United Airlines slid 4.85 percent as both companies offered to waive some fees for travelers forced to alter travel plans as a result of the outbreak.