A stream of data in recent weeks has shown inflation continues to slow and the jobs market is softening, while other economic indicators suggest the central bank is on course to bring prices under control while averting a recession.
The latest figures on Wednesday showed US consumer confidence bouncing back more than forecast, while home sales came off a 13-year low.
Eyes are now on the release Friday of the personal consumption expenditures (PCE) price index, the Fed's preferred gauge of inflation, which could be key in the bank's decision-making at its next meeting in January.
The most recent gathering ended with officials indicating they would cut about three times in 2024, sparking a buying frenzy in markets and forcing some policymakers to try to temper expectations.
The data could "hold the crucial tarot cards likely to steer market dynamics into year-end and beyond", said SPI Asset Management's Stephen Innes.
"An upside surprise in the figures is crucial to bolster the credibility of the Federal Reserve's efforts to push back against market rate cut expectations. Failure to see an upside surprise could challenge the Fed to counter expectations of a rate cut in March.
"In such a scenario, risk assets could rebound, and the year-end rally would likely regain momentum."
The upbeat data was not enough to stop investors taking their cash off the table, with observers saying a pullback was inevitable after such a strong rally.
"It certainly looks like it has become very one-sided, and it is a scary world when everybody gets on one side of the boat," said Cameron Dawson of Newedge Wealth.
"The market is very extended, we do see it being very overbought. But we're in this melt-up period and so oftentimes things can get even sillier before they really do have a pullback," he told Bloomberg Television.
Wall Street's three main indices lost more than one per cent apiece, with the Dow coming off five straight records.
And Asia followed suit, with Tokyo, Hong Kong, Shanghai, Sydney, Seoul, Taipei, Jakarta and Manila well in the red. Singapore and Wellington eked out small gains.
In corporate news, Toyota sank nearly four percent in Tokyo after subsidiary Daihatsu said Wednesday it will suspend shipments of all car models in Japan and abroad following news it had rigged safety tests.
The news got worse for the world's biggest carmaker later in the day when it said it was recalling around a million Toyota and Lexus vehicles in the United States, citing concerns about their airbag systems. - AFP