Stock market volatility rose to its highest level since March on Monday as investors positioned themselves ahead of the Federal Reserve's policy meeting, with the CBOE Volatility Index jumping 15 percent to 19.4. The S&P 500 fell 0.8 percent in light trading ahead of the Wednesday announcement.
The market has been trading in a narrow range for the past two weeks as investors await clarity on the Fed's rate path. Economic data released last week showed mixed signals, with strong employment numbers balanced against cooling inflation.
"Markets are holding their breath ahead of the Fed decision," said JPMorgan Chief Market Strategist Marko Kolanovic. "The wildcard is whether Powell provides clear guidance on the timing of potential rate cuts."
Technology stocks led the decline, with the Nasdaq Composite dropping 1.2 percent as investors rotated out of high-growth names. The semiconductor sector was particularly weak, with the Philadelphia Semiconductor Index falling 2.1 percent.
Bond markets reflected the uncertainty, with the yield on 10-year Treasury notes holding near 4.3 percent. The yield curve, which had been inverted for over two years, has normalized as investors anticipate a potential shift in monetary policy.