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 percent apiece, with the Dow coming off five straight records.
And Asia followed suit in the morning but fared better in the afternoon
Tokyo, Sydney, Seoul, Taipei, Jakarta and Manila retreated but. Shanghai, Hong Kong, Singapore, Mumbai, Bangkok and Wellington eked out gains.
London, Frankfurt and Paris opened lower.
In corporate news, Toyota fell four percent in Tokyo -- having dropped more than five percent at one point -- 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.
- Key figures around 0810 GMT -
Tokyo - Nikkei 225: DOWN 1.6 percent at 33,140.47 (close)
Hong Kong - Hang Seng Index: FLAT at 16,621.13 (close)
Shanghai - Composite: UP 0.6 percent at 2,918.71 (close)
London - FTSE 100: DOWN 0.3 percent at 7,690.65
Dollar/yen: DOWN at 143.24 yen from 143.63 yen on Wednesday
Euro/dollar: UP at $1.0948 from $1.0941
Pound/dollar: UP at $1.2642 from $1.2633
Euro/pound: UP at 86.60 pence from 86.59 pence
West Texas Intermediate: DOWN 0.2 percent at $74.10 per barrel
Brent North Sea crude: DOWN 0.1 percent at $79.61 per barrel
New York - Dow: DOWN 1.3 percent at 37,082.00 (close)
dan/ssy
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