Wall Street widely expects Fed policy-makers will boost a key interest rate to the highest level in five years when they meet on Wednesday.
Lackluster forecasts from Cisco Systems Inc. and Federated Department Stores Inc. left stocks slightly lower Wednesday. Trading was likely to be volatile as Wall Street looked ahead to the Fed's policy statement Wednesday afternoon. While the central bank was expected to boost short-term lending rates to 5 percent, investors were fixated on whether the Fed would indicate that a pause — or more increases — could be in store.
In midday trading, the Dow lost 3.44, or 0.03 percent, to 11,636.33, a fresh six-year high. The Dow was about 85 points from its best-ever close of 11,722.98, reached Jan. 14, 2000.
Broader stock indicators declined. The Standard & Poor's 500 index was down 2.02, or 0.15 percent, at 1,323.12, and the Nasdaq composite index sank 9.75, or 0.42 percent, to 2,328.50.
Bonds inched upward as traders awaited the Fed's statement. The yield on the 10-year Treasury note slid to 5.1 percent from 5.13 percent late Tuesday.
The prospect of higher interest rates weighed on the dollar, which fell against the Japanese yen and was flat versus European currencies. Meanwhile, gold prices climbed past a 25-year high of $700 an ounce.
It would be the 16th quarter-point increase in a credit tightening cycle that began nearly two years ago and would leave the federal funds rate, the interest that banks charge each other, at 5 percent.
A Fed rate increase would raise borrowing rates for millions of consumers and businesses as commercial banks match the move with a quarter-point jump in the prime lending rate, pushing it to 8 percent.
There is a wide split over what happens next. Some economists believe the Fed will stop with the funds rate at 5 percent, up significantly from the 46-year low of 1 percent in effect before the rate increases began.
Others think the Fed will only pause for a meeting or two and then raise rates one or two more times. And still a third group thinks there won't be any pause as the Fed continues a steady march toward higher rates.
Part of the blame for the confusion is being assigned to Bernanke, who took over as Fed chairman on Feb. 1.
He roiled markets over the past two weeks, first with testimony before the Joint Economic Committee on April 27 that the markets read as a strong signal that the Fed was going to pause in its string of rate increases, and then the next week when he told a reporter that the markets had misinterpreted his comments.
Economists said that the incident showed that there is a new Fed chairman with a different speaking style.
"The markets got used to Greenspan over the last 18 years and we figured out how to decipher him. We are now working out how to decipher Bernanke," said David Wyss, chief economist at Standard & Poor's in New York. "It is like interpreting the Delphi oracle of ancient Greece."
Some analysts said Bernanke's mistake was in trying to give too much information in his congressional testimony. He raised the possibility that the Fed might take a pause in its two-year campaign, which has resulted in a rate boost at every one of its meetings going back to June 2004.
At the same time, Bernanke sought to keep the Fed's options open by saying a pause in rate increases "does not preclude actions at subsequent meetings."
The problem was that investors, anxious to know when the Fed will finally stop raising rates, interpreted Bernanke's comments about a pause as a halt in rate increases.
"Bernanke made a freshman's mistake," said David Jones, chief economist at DMJ Advisors, a private consulting firm. "This is a classic example of a new Fed chairman with good intentions but unintended results on the market."
After Bernanke's congressional testimony, bond markets began to worry that a Bernanke Fed might not be as vigilant as the Greenspan Fed in fighting inflation. That caused bond prices to drop and the interest rate on bonds to rise.
Bernanke, who has stressed that he plans to be every bit the inflation-fighter that Greenspan was, then told a CNBC reporter that the markets had misread his JEC testimony, causing more market gyrations.
Because of this incident, many analysts are looking for only small changes in the Fed's statement that will accompany Wednesday's decision.
Some believe that the part of the Fed's statement where it has said further rate increases "may be needed" might be qualified to say "may be needed at some point" to introduce the idea of a possible pause.
The Fed's goal is to slow economic growth enough to keep inflation pressures from rising but not raise rates too much that it pushes the country into a recession.
Many economists said they still believe that Tuesday's rate boost will be the last in this series, but they caution that this view could be proven wrong if the economy does not slow or if the latest jump in energy prices begins to spill over into more widespread inflation troubles.
In any event, forecasters predicted Bernanke will be brushing up on his communication techniques.
"This was a minor flap," said Lyle Gramley, a former Fed board member and now an adviser at Schwab Washington Research Group. "But it has to be recognized that good communication is a work in progress."