The Dow shed a half a percent, the S&P 500 dipped more than a tenth of a percent and the Nasdaq gained a tenth.

A Commerce Department report showed the Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, climbed 3.3% in July on an annual basis, in line with expectations.

The core PCE - excluding volatile food and energy prices - the rose 4.2% in July, year-on-year, also in line with estimates.

Traders' overwhelmingly believe the Fed will pause rate hikes in September. Any move to the contrary could roil markets next month, says Sam Stovall, Chief Investment Strategist, CFRA Research.

"So if there is a rate hike, then I think markets will be taken by surprise and that will cause the markets to head a bit lower. Also, the more that we see an uptick in mortgage rates, etc. or the cost of a loan - that will further restrict loans by banks and could throw us closer to a recession."

In company news, shares of Salesforce rallied 3% following upbeat revenue forecasts from the cloud-based software provider as it benefits from price hikes and a resilient demand.

Shares of Dollar General slumped 12% after the discount retailer cut its annual same-store sales forecast. Rival Dollar Tree's shares fell nearly 2%.

And dismal manufacturing data from China hit U.S.-listed shares of Chinese companies JD.com and Baidu, with both down roughly 2%.

Investors now await non-farm payrolls data due on Friday for greater clarity on the Fed's likely monetary path.