The reading on labour costs followed a string of recent reports out of Washington suggesting the central bank's battle against inflation has some way to go, even with borrowing costs at two-decade highs.
It also adds to the angst among investors leading up to the Fed's latest policy decision later in the day, which many were already expecting to see officials turn more hawkish.
That will be followed by closely watched non-farm payrolls (NFP) figures that should provide a fresh snapshot of the labour market, which has so far remained resilient to the high rates environment.
Wall Street's three main indexes tanked Tuesday after news that the employment cost index, the Fed's preferred gauge of wage inflation, came in hotter than forecast in the first quarter.
That provided another hammer blow to hopes the Fed will cut rates this year, with bets already reduced to just one by January -- compared with an expected six at the start of 2024.
Some are even warning of a possible hike.
Investors ran for the sidelines on the report, which came as another batch of data showed US consumer confidence had tumbled to its lowest level since July 2022.
The wage "data delivers a straightforward message: the US economy isn't showing signs of rapidly slowing inflation", said SPI Asset Management's Stephen Innes.
"These numbers essentially bury any hopes for imminent rate cuts, unless, of course, a significant shift occurs such as a negative (NFP) print.
"Overall, this data provides little support for the Fed to consider rate cuts shortly, signalling a need for more convincing evidence to prompt such action."
The negative mood spilled over into Asia, where most markets were closed for a holiday.
Tokyo, Sydney and Wellington were all in the red, while London opened slightly higher.
"Public holidays in China and parts of Europe will thin markets slightly, and there's likely to be a level of risk aversion in Asian trade today going into the (Fed) decision," Capital.com analyst Kyle Rodda said.
"If the Fed asserts a high probability of no cuts this year, or even the open possibility of another hike, that could deepen the sell-off in stocks."
The yen edged down but largely stood its ground against the dollar after the volatility of Monday, when it hit a fresh 34-year low against the greenback and then snapped sharply back amid suggestions Japanese authorities intervened in forex markets.
While some stability has returned, traders remain on edge for any wild movements, with observers warning more were likely owing to the vast difference between the Bank of Japan's loose monetary policy and that of other central banks.
The dollar was also up against sterling and the euro ahead of the Fed decision.
Oil prices slipped on hopes for a ceasefire in Gaza as top US diplomat Antony Blinken on Tuesday urged Hamas to accept a truce offer.
The Palestinian militant group said it was considering a plan for a 40-day ceasefire and the exchange of scores of hostages for larger numbers of Palestinian prisoners.
- Key figures around 0705 GMT -
Tokyo - Nikkei 225: DOWN 0.3 percent at 38,274.05 (close)
London - FTSE 100: UP 0.2 percent at 8,157.83
Hong Kong - Hang Seng Index: Closed for a holiday
Shanghai - Composite: Closed for a holiday
Dollar/yen: UP at 157.90 yen from 157.80 yen on Tuesday
Euro/dollar: DOWN at $1.0651 from $1.0673
Pound/dollar: DOWN at $1.2469 from $1.2493
Euro/pound: UP at 85.44 pence from 85.41 pence
West Texas Intermediate: DOWN 1.1 percent at $81.03 per barrel
Brent North Sea Crude: DOWN 1.0 percent at $85.46 per barrel
New York - Dow: DOWN 1.5 percent at 37,815.92 (close)
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