US equity markets closed down on Tuesday as traders, already cautious of making new bets on the eve of a US Federal Reserve meeting expected to bring another large interest rate hike, absorbed further evidence of inflation slowing American business.

The benchmark S&P 500 index has dropped this year as investors fear aggressive policy tightening measures by the Fed could tip the US economy into a recession.

It closed for the third straight session below 3,900 points - a level considered by technical analysts as a strong support for the index - as last week's dire outlook from delivery firm FedEx was repeated, this time by automaker Ford Motor.

The S&P 500 lost 1.1 percent to end at 3,855, the Nasdaq Composite lost 0.9 percent to 11,425. The Dow Jones Industrial Average fell 1.0 percent to 30,706.

Shares of Ford slumped after it flagged a bigger-than-expected US$1 billion hit from inflation and pushed delivery of some vehicles to the fourth quarter due to parts shortages.

Rival General Motors also sank.

"We have seen some bellwethers talk about the pressures they are facing, so we could see some margin compression and some softening in the topline numbers in the third-quarter earnings," said Greg Boutle, head of US equity & derivative strategy at BNP Paribas.

The US central bank is widely expected to hike rates by 75 basis points for the third straight time at the end of its policy meeting on Wednesday, with markets also pricing in a 17 percent chance of a 100 bps increase and predicting the terminal rate at 4.49 percent by March 2023.

Focus will also be on the updated economic projections and dot plot estimates for cues on policymakers' sense of the endpoint for rates and the outlooks for unemployment, inflation and economic growth.

Adding to a mixed set of economic data, a Commerce Department report showed residential building permits - among the more forward-looking housing indicators - slid by 10 percent to 1.517 million units, the lowest level since June 2020.

The benchmark US 10-year Treasury yield hit 3.56 percent, its highest level since April 2011, while the closely watched yield curve between two-year and 10-year notes inverted further.

An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in one to two years.

"There are a lot of headwinds to prevent sustained rallies. It's hard to have (price-to-earnings) expansion while the Fed is tightening," said BNP's Boutle.

All of the 11 major S&P sectors declined. (Reuters)