With inflation still sitting well above the central bank's target and the labour market showing few signs of softening, decision-makers have warned that more tightening will be needed to achieve their goal.
However, while the US economy remains in reasonable health, there is a growing concern that the Fed could tip it into recession next year if it keeps squeezing, with rates already at a 22-year high.
The bank indicated last week another lift could be on the cards before year's end, while boss Jerome Powell and other policy board members have said they could keep borrowing costs elevated for an extended period, with fewer cuts than hoped in 2024.
Analysts said investors were trying to come to terms with that prospect, and a spike in Treasury yields -- a gauge of future rates -- was causing a lot of unease in trading rooms, particularly with earnings season looming.
In a sign of the worry among investors, the VIX "fear gauge" of volatility is sitting at its highest level since late May following data showing a bigger-than-expected drop in US consumer confidence owing to higher gasoline and food prices.
"The expected further increase in volatility over the next few weeks is valid," said Stephen Innes of SPI Asset Management.
"Earnings season jitters are likely compounding the current 'higher-for-longer' sell-off and encouraging folks to pull even more chips off the table.
"During this period, companies often announce whether they will surpass or fail to reach their full-year goals; hence, corporate earnings could be viewed as a place-setter and may dictate if there is any Santa rally this year."
- Washington stand-off -
All three main indexes on Wall Street tanked Tuesday, shedding more than one percent apiece.
Asia started on the back foot Wednesday but most markets managed to eke out gains following a painful start to the week.
Hong Kong and Shanghai rose on bargain-buying after two days of steep losses, while Tokyo, Seoul, Taipei, Jakarta, Mumbai and Manila were also up, but Sydney, Singapore, Wellington and Bangkok were in the red.
London, Paris and Frankfurt were all up in the morning.
The dollar held gains against its peers, with a spike to an 11-month high above 149 yen putting the spotlight on Japanese authorities who have warned they are willing to intervene in forex markets to support their currency, as they did in November.
"The rise in the US dollar, along with yields appears to speak to an expectation that sticky inflation will be sustained, keeping rates higher for longer, particularly since oil and gasoline prices appear to be showing little sign of drifting back from their recent highs," said Michael Hewson at CMC Markets.
Traders are also keeping tabs on Washington, where a standoff between lawmakers over a budget bill threatens to cause a government shutdown, which Moody's has warned could have a negative impact on the country's credit rating.
Senators from both parties drafted a last-ditch short-term proposal Tuesday -- with a September 30 deadline for a deal -- that would keep the government running until November 17.
But there was no immediate indication that the warring factions of House Republicans, who have forced the showdown over government funding, would take it up if passed in the Senate.
"Shutting the government down over a domestic budget dispute doesn't strengthen anyone's political position," said Senate Republican leader Mitch McConnell. "It just puts important progress on ice. And it leaves millions of Americans on edge."
- Key figures around 0810 GMT -
Tokyo - Nikkei 225: UP 0.2 percent at 32,371.90 (close)
Hong Kong - Hang Seng Index: UP 0.8 percent at 17,611.87 (close)
Shanghai - Composite: UP 0.2 percent at 3,107.32 (close)
London - FTSE 100: UP 0.1 percent at 7,629.33
Dollar/yen: DOWN at 149.03 yen from 149.08 yen on Tuesday
Euro/dollar: DOWN at $1.0568 from $1.0575
Pound/dollar: DOWN at $1.2150 from $1.2158
Euro/pound: UP at 86.98 pence from 86.96 pence
West Texas Intermediate: UP 1.0 percent at $91.28 per barrel
Brent North Sea crude: UP 0.7 percent at $94.59 per barrel
New York - Dow: DOWN 1.1 percent at 33,618.88 (close)
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