The Fed's top policy committee holds its scheduled two-day meeting on interest rates this week, and it wraps up with a news conference by Fed chairman Ben Bernanke on Wednesday afternoon.
"And as has been their habit, markets will react to whatever he says and then it'll take a few days and then they will refocus on what really matters, which is the broader state of the U.S. economy and the global economy and people will start to focus on the upcoming earnings season," said Norman Raschkowan, North American strategist with Mackenzie Financial Corp.
Toronto and New York markets racked up losses last week on nervousness about Fed intentions, with the TSX's main index losing 186 points or 1.5 per cent.
The Dow industrials fell 178 points or 1.17 per cent last week but the blue chip index is still up 15 per cent year to date, resulting from a rally fuelled in large part by the Fed's quantitative easing program.
Musings by Bernanke on May 22, when he briefed the U.S. Congress, have chipped away at this year's strong gains on American markets and driven Toronto further into negative ground.
At that time, Bernanke said that the Fed might pull back on its US$85 billion-a-month bond-buying program, known as quantitative easing, if economic data improves, especially hiring.
"So I guess the question is, how is it going to play out?" said John Johnston, chief strategist at Davis Rea Ltd.
"And Bernanke said we may consider tapering over the next few meetings. So it probably means not this meeting, but it certainly sets up September, October or November. Some time over the September-December period and markets are making some bets in there."
The program has been intended to encourage borrowing, spending and investing. But traders worry that when the Fed slows its purchases it could cause interest rates to rise sharply, affecting many parts of the financial system and the economy. Mortgage rates have already been rising as yields on benchmark government bonds increase, from a recent low of 1.6 per cent in early May to around 2.2 per cent last week.
"And mortgage applications are actually falling as interest rates have gone up," added Johnston.
The 30-year fixed rate mortgage rate in the U.S. rose to 3.98 per cent in the week ending June 13, the highest rate since April, 2012, up from 3.91 per cent in the prior week. The rate has increased for six weeks.
Deterioration in the housing sector would be a major hit for the U.S. economy as both sales and prices have registered strong gains this year.
U.S. home prices soared 12.1 per cent in April from a year earlier, the biggest gain since February 2006, while sales of previously occupied homes ticked up to a 3 1/2 year high that month.
Traders will get the latest reading on the health of the U.S. housing sector on Tuesday. Housing starts for May are expected to rise to an annual rate of 952,000, up about 11.5 per cent.
In Canada, traders will look to top tier economic data coming out on Friday.
April retail sales are expected to show a rise of 0.2 per cent.
Statistics Canada will also release the May reading on inflation. The consumer price index is expected to edge up around 0.2 per cent during May, reflecting rising energy prices.
Last week's decline left the TSX down two per cent year to date, lagging behind not only the U.S. but Japan and even Europe. And analysts say it's hard to see what can get the main Canadian market back on track for a decent gain this year.
"It's really commodity prices," said Raschkowan.
"The materials index is down 25 per cent, energy down one per cent. Between the two of them, they still represent better than a third of the index. And with the World Bank cutting its global growth estimate for this year, it just shows that there is no great reason to expect commodities to move sharply higher. So ... you’re looking at a single digit sort of earnings growth profile for the rest of the economy and therefore single digit returns for the Canadian market."