"There's a strong consensus that the Fed is going to cut rates by 25 basis points but signal that it's done for now," said Ken Tower, chief market strategist at Covered Bridge Tactical. "That's been putting pressure on commodities prices over the past few days."
The Dow Jones Industrial Average ended down 39 points, or 0.3%, at 12,831, with 18 of its 30 components trading lower.
Shares of pharmaceutical giant Merck weighed on the Dow, losing 10% as the Food and Drug Administration rejected its cholesterol drug Cordaptive, one of the key drugs in its pipeline.
Steve Scala, an analyst at Cowen & Co., called the FDA ruling a major disappointment and said it may also hurt Eli Lilly , which has a similar drug in the pipeline.
The S&P 500 index fell 5.4 points to 1,390, while the Nasdaq Composite rose 1.7 point to 2,426. Helping to lift tech stocks, Corning shares rose 3.3% as the group said its first-quarter profit tripled on LCD sales.
The energy and materials segments weighed on the broader market, pressured by a firmer dollar. A stronger dollar makes dollar-denominated commodities more expensive for holders of other currencies.
The dollar firmed on rising expectations that the Fed will signal a pause in rate cuts Wednesday. Crude-oil futures fell sharply, losing over $3 to end at $115.63 a barrel. On Monday, crude surged to a new record of $119.93 amid supply concerns.
On Wednesday, the market will digest both the Fed's decision and first-quarter gross domestic product data.
Futures markets and many economists now anticipate the Fed will cut rates by a quarter percentage point, to 2%, and could then put rate actions on hold for several months.
First-quarter gross domestic product data may reveal the economy has shrunk this year. Economists polled by MarketWatch are anticipating a 0.2% rise.
In the meantime, stocks showed little reaction to a report showing U.S. consumer confidence fell in April, perpetuating a downward slide as inflation expectations rose to match the record high reached after Hurricane Katrina.
The Conference Board said its April consumer confidence index fell to 62.3 from a March reading that was revised upward to 65.9. Consumer confidence is at its lowest since March 2003. Economists surveyed by MarketWatch had expected an April reading of 61.0.
Office Depot rose 8.7% after topping first-quarter analyst estimates.
MasterCard climbed 13% after more than doubling its profit on a 29% revenue rise. According to a report in The Wall Street Journal, the Federal Reserve and two other regulators plan to propose strict policies on credit-card issuers.
Oil giants BP and Royal Dutch Shell each beat analyst estimates by about $1 billion on their way to reporting rises in first-quarter profit.
By Nick Godt