Global markets endured a volatile time last week, with traders spooked by a range of issues including a US rating downgrade, rising Treasury yields and a lack of concrete measures to boost Chinese growth.
While inflation continues to come down in the United States and parts of the economy are showing signs of slowing, there is plenty of speculation that the Fed will lift rates at least once more this year.
A much-anticipated jobs report Friday showed fewer-than-forecast new posts were created last month, playing into the view that the central bank could stand pat.
The cheer was offset by a still-strong read on wage growth, which backed up the hawkish outlook for more tightening, with Bloomberg reporting that traders see a 40-percent chance of another hike this year.
In the medium term, they still see 1.25 percentage points of cuts by the end of 2024.
The debate was also taking place at the central bank, with Chicago Fed boss Austan Goolsbee saying officials had to be patient and that he was optimistic inflation can be brought down without sparking a recession.
He added that the question should be how long borrowing costs are kept at elevated levels, pointing out "if you hold at 5.25 percent, 5.5 percent, five-and-whatever while inflation goes down, that is a restrictive environment".
"Holding is increasing restrictiveness in that sense."
However, Governor Michelle Bowman said policymakers might need to lift again to achieve stability in prices.
And Win Thin, at Brown Brothers Harriman and Co, warned: "As we've pointed out before, the easy part is getting from eight percent (inflation) to four percent; the hard part is getting it from four percent to two percent.
"Because of this, we believe the markets continue to underestimate the Fed's capacity to tighten."
Investors will be keeping a close eye on fresh US inflation data this week as well as jobless claims figures, hoping for a better idea about the Fed's plans.
"While markets are still pricing in a 40-percent chance of one more rate hike before the end of the year, this figure could swing either way in the event of a hot CPI print later this week," said Michael Hewson at CMC Markets.
"If next month's jobs report is of a similar 'goldilocks' variety then a pause seems the most likely outcome from the next Fed rate decision. Whichever way we go with the data in the coming weeks, a pause still seems the most plausible outcome."
Wall Street's three main indexes ended Friday in the red, having suffered a late pullback from the morning's rally.
And Asian investors struggled to get the week off to a positive start, with markets mixed at the start of the week.
Tokyo, Mumbai, Singapore, Taipei, Manila, Bangkok and Jakarta all rose but Hong Kong was flat, while Shanghai, Sydney, Seoul and Wellington fell.
Frankfurt was flat after news that German industrial output plunged in June.
Paris and London fell.
Oil dipped but mostly held Friday's rally after Ukraine carried out a drone attack on a Russian tanker in the Black Sea at the weekend, fuelling unease about supplies from the major producer, as well as rising costs.
"Freight rates will be ballooning next week as the risks of carrying anything across the Black Sea proliferate," Viktor Katona, at market intelligence firm Kpler Ltd, said.
He added that the price of transporting crude to India could surge by up to 50 percent.
- Key figures around 0810 GMT -
Tokyo - Nikkei 225: UP 0.2 percent at 32,254.56 (close)
Hong Kong - Hang Seng Index: FLAT at 19,537.92 (close)
Shanghai - Composite: DOWN 0.6 percent at 3,268.83 (close)
London - FTSE 100: DOWN 0.2 percent at 7,550.07
Euro/dollar: DOWN at $1.0987 from $1.1012 on Friday
Pound/dollar: DOWN at $1.2738 from $1.2748
Euro/pound: DOWN at 86.28 from 86.35 pence
Dollar/yen: UP at 142.16 yen from 141.77 yen
West Texas Intermediate: DOWN 0.4 percent at $82.51 per barrel
Brent North Sea crude: DOWN 0.3 percent at $85.97 per barrel
New York - Dow: DOWN 0.4 percent at 35,065.62 (close)
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