Meanwhile, the Fed meeting comes as oil prices have shot up due to escalating tensions in the Middle East. Brent crude hit $100 a barrel on Thursday.
That has fanned fears that policymakers will need to be more aggressive in raising rates to control inflation, which consistently has run well above the Fed's 2% annual target.
The central bank was expected to hold rates steady when it gives its monetary policy statement on Wednesday, with Fed funds futures late on Friday pricing in a 38% chance of a quarter-percentage-point rate increase, according to LSEG data.
But there was still some uncertainty on Wall Street over whether the Fed, whose new chair, Kevin Warsh, is overhauling monetary policy communication, might surprise markets.
"The possibility of a shock rate hike cannot be ruled out entirely," BNP Paribas economists said in a note this week.
The meeting will be the second under Warsh, who has shunned forward guidance while vowing to bring inflation down to target.
"He's really not showing the Fed's cards," said Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management.
Even if the central bank holds rates steady on Wednesday, investors will look for hints about the future path of rates in the policy statement and Warsh's ensuing press conference. Fed funds futures are factoring in two quarter-point rate hikes by the January 2027 meeting.
"If you get the feeling that there are more committee members that are moving towards these multi-hike scenarios over the balance of the year, then I think that's going to be a problem for the market," said Scott Wren, senior global market strategist at the Wells Fargo Investment Institute.
Higher interest rates raise borrowing costs for consumers and companies, slowing the economy and often weighing on stocks.
They can also translate into higher Treasury yields, which already have been rising in recent weeks, creating competition for equities. The benchmark 10-year Treasury yield US10YT=RR topped 4.7% on Thursday, reaching its highest level since early 2025. Yields move opposite to the price of bonds.
Investors also get a series of updates on the U.S. economy next week, with reports due on second-quarter gross domestic product, monthly inflation and consumer sentiment.
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