Comments from senior Fed officials in recent days that suggest a bias toward raising benchmark US interest rates have pushed investors to re-examine minutes from the US central bank's most recent meeting in July, analysts said.
"Even though the minutes came out on Wednesday afternoon, I suspect that participants are still digesting their contents and updating their expectations," said Carl Tannenbaum, chief economist for Northern Trust in Chicago.
San Francisco Fed chief John Williams late Thursday called for the Fed to return to monetary tightening "sooner rather than later."
Those comments followed New York Fed President William Dudley who lauded recent strong gains in US employment after saying earlier in the week that the Fed could raise rates as soon as next month.
Investors are now looking to an annual meeting of central bankers from around the world in Jackson Hole, Wyoming, next week, at which Fed Chair Janet Yellen is scheduled to speak, for clues on the course of monetary policy.
"I think we're due for a pause here as we look for greater clarity over the next couple of weeks," said Terry Sandven, chief equity strategist at US Bank Wealth Management in Minneapolis.
"Performance year-to-date has been resilient, and we expect that type of behaviour to continue as you move into the second half of the year."
I think we're due for a pause here as we look for greater clarity over the next couple of weeks.
The Dow Jones industrial average fell 45.13 points, or 0.24 per cent, to 18,552.57, the S&P 500 lost 3.15 points, or 0.14 per cent, to 2,183.87 and the Nasdaq Composite dropped 1.77 points, or 0.03 per cent, to 5,238.38.
The US benchmark S&P 500 stock index is up 7 per cent this year. Its recent run to record highs has been partly supported by expectations that the Fed will continue to keep rates low, as well as some upbeat earnings and economic news.
European shares fell 0.8 per cent on the day and nearly 2 per cent for the week, their biggest weekly loss since mid-June. All major sectors in Europe were in the red.
Performance year-to-date has been resilient, and we expect that type of behaviour to continue as you move into the second half of the year.
A gauge of stock markets around the world fell 0.4 per cent.
Trading volumes were thin amid a summer lull in the United States and Europe. Thursday's session was the quietest across Europe's stock exchanges in nearly three months, according to Thomson Reuters data.
Brent crude fell 0.2 per cent to US$50.79 a barrel, ending a six-day run of gains, while WTI light crude rose 0.56 per cent to US$48.49, having touched its highest level since July 5 earlier in the day.
The US dollar firmed against six major world rivals on the revived Fed rate-hike expectations. The dollar index rose 0.35 per cent to 94.480, moving away from eight-week lows touched on Thursday.
Fed funds futures prices show investors now see a greater than 50 per cent chance of a rate hike before year-end, according to CME Group's FedWatch tool.
US Treasury debt prices fell as traders locked in recent gains ahead of next week's government debt supply and the Jackson Hole meeting. US 10-year Treasury notes fell 13/32 in price to yield 1.58 per cent.
