The Fed has been on an aggressive campaign of interest-rate hikes since March last year, rapidly raising rates to help target high inflation, which remains above its long-term target of two percent.
With the Federal Open Market Committee (FOMC) widely expected to raise its base rate a quarter-point on Wednesday, analysts will be looking for any "revisions to the forward guidance in its statement," Goldman Sachs' chief US economist David Mericle wrote in a recent note to clients.
"We expect the Committee to signal that it anticipates pausing in June but retains a hawkish bias, stopping earlier than it initially envisioned because bank stress is likely to cause a tightening of credit," he said.
Futures traders also see a more than 95 percent chance that the Fed will raise its benchmark lending rate by 25 basis points on Wednesday, according to CME Group.
Such a move would bring the interest rate to between 5 and 5.25 percent -- its highest level since before the global financial crisis.
Like the Fed's previous rate decision, the FOMC meeting on May 2 and 3 takes place shortly after one of the largest bank failures in American history.
First Republic's failure on Monday beat Silicon Valley Bank's (SVB) dramatic collapse to second place in the unenviable list of the largest commercial banking failures in US history.
In March, the Fed held off a larger rate hike, instead opting for a quarter-point rise amid a banking crisis unleashed by SVB's collapse.
First Republic's failure has not sent the same shockwaves throughout the financial markets, despite some volatility in regional banking stocks, and most analysts still expect the Fed to plow ahead with another quarter-point hike on Wednesday.
JPMorgan agreed to buy First Republic from federal regulators in a deal announced in the early hours of Monday morning.
"I think this is going to stabilize the system, which is a good thing," JPMorgan chief executive Jamie Dimon said in a call with reporters shortly after the deal was announced.
The likelihood of the Fed giving firm guidance on a future pause is far from a done deal, according to some analysts.
"With inflation remaining stubbornly elevated, we expect the Committee to maintain a tightening bias and repeat the language from March," Deutsche Bank economists wrote in a recent note to clients.
Following a long holiday weekend for markets across Europe and Asia, trading resumed to news that annual inflation in the eurozone edged up to seven percent in April after five months of decline.
Consumer prices rose from a rate of 6.9 percent in March, which could further encourage the European Central Bank to raise interest rates once more on Thursday, according to analysts.
"Strategists are betting that we will see a slight pullback in the key core inflation data, but this has proven a stickier indicator in the eurozone than in the US and market hopes have been disappointed before," noted Matthew Ryan, head of market strategy at financial services firm Ebury.
Wall Street opened lower, with the Dow shedding 0.4 percent.
In Europe, London, Frankfurt and Paris were all lower in afternoon trading.
"Investors appear to be treading carefully ahead of some key interest rate announcements this week, most notably the Fed on Wednesday but also the ECB one day later," said market analyst Craig Erlam at Oanda trading group.
Australia's central bank on Tuesday delivered a surprise interest rate hike to an 11-year high, dashing hopes it would hold them steady as inflation shows signs of slowing.
Adding to investor uncertainty were fears about the banking sector after another US regional lender went under.
Regulators on Monday announced the seizure of First Republic and that it had been sold to JPMorgan Chase, making it the second biggest bank by assets to collapse in US history.
The takeover of First Republic came after the collapse of three US midsized lenders in March, including Silicon Valley Bank (SVB) and Signature Bank -- which rattled markets and raised contagion worries.
SVB's failure came after it took on too much interest rate risk, among other issues.
Nevertheless, the US central bank is widely expected to raise its benchmark lending rate for a tenth and possibly final time in the current cycle -- by another quarter-point. The ECB is seen as making a quarter or half-point hike.
Elsewhere, data showed that Hong Kong's economy grew in the first quarter, ending a disastrous year-long spell during which the finance hub was effectively closed for business owing to pandemic restrictions.
Oil prices fell further, with the main international contract, Brent North Sea, under $80 per barrel.
"The post-OEPC+ gains have now been wiped out which suggests traders are now of the belief that the economic outlook has deteriorated to the extent that the output cut won't create the deficit that was feared when some were calling for $100 oil," said Oanda's Erlam.
Multiple members of the OPEC+ exporters' alliance unexpectedly slashed production by a total of more than one million barrels per day at the beginning of April. Brent jumped back above $80 per barrel, but never made it to $90.
- Key figures around 1100 GMT -
New York - Dow: DOWN 0.4 percent at 33,904.64 points
London - FTSE 100: DOWN 0.4 percent at 7,835.57
Frankfurt - DAX: DOWN 0.5 percent at 15,850.67
Paris - CAC 40: DOWN 0.8 percent at 7,429.32
EURO STOXX 50: DOWN 0.6 percent at 4,332.59
Tokyo - Nikkei 225: UP 0.1 percent at 29,157.95 (close)
Hong Kong - Hang Seng Index: UP 0.2 percent at 19,933.81 (close)
Shanghai - Composite: Closed for holiday
Euro/dollar: DOWN at $1.0956 from $1.0978 on Monday
Pound/dollar: DOWN at $1.2454 from $1.2498
Dollar/yen: UNCHANGED at 137.45 yen
Euro/pound: UP at 87.94 pence from 87.80 pence
West Texas Intermediate: DOWN 1.6 percent at $74.43 per barrel
Brent North Sea crude: DOWN 1.5 percent at $78.12 per barrel