The S&P/ASX200 fell 39.3 points by midday on Thursday to be down 0.44 per cent to 8,927, as the broader All Ordinaries slipped 39.9 points lower, down 0.43 per cent, to 9,146.
"US equity markets closed lower overnight after this morning's Federal Open Market Committee meeting delivered a hawkish surprise that triggered a sell-off in stocks and a sharp rally in US yields and the US dollar," IG market analyst Tony Sycamore said.
"This time around, nine of the 19 officials see at least one rate hike by the end of the year, and the policy statement notably removed earlier language around potential cuts."
The local exchange briefly improved before dipping into the red as the federal government announced small business carve-outs from its proposed capital gains tax reforms to ease concerns about the controversial shake-up.
Oil prices continued to fall as the US and Iran signed their long-awaited memorandum of understanding, which includes a 60-day truce, opening the Strait of Hormuz and lifting sanctions on Iranian crude supplies.
Local energy stocks shrugged off the dip to gain 0.4 per cent by midday AEST, as Woodside firmed after selling off for most of the week.
Miners were sluggish, the materials handing back 0.9 per cent as gold stocks came off the boil and mega miners BHP, Rio Tinto and Fortescue lost ground as iron ore futures slumped to 15-week lows.
Gold itself slumped as the markets repriced the US interest rate outlook, before partially recovering to $US,4320 ($A6,142) an ounce by lunchtime.
The major banks also weighed on the broader market, with financials slipping 0.8 per cent as NAB led the big four lower.
QBE Insurance offered the sector some support, gaining 1.8 per cent after appointing Monarch Point Re chief executive Christopher Harris to its board as a non-executive director.
Traditionally defensive sectors of consumer staples and health care rose 0.5 per cent each, while IT stocks tumbled 1.1 per cent.
In company news, Qantas shares gained one per cent to $10.08 after the company announced its world-first, non-stop Sydney-to-London flights would launch in October 2027.
Washington H. Soul Pattinson shares surged 1.8 per cent after agreeing to offload its stake in Brickworks industrial joint venture property trusts to Goodman Group for $1.9 billion.
Australian superannuation funds are on track for a fourth straight year of strong returns, with Chant West tipping the median growth fund return for the financial year to date at nine per cent.
The Australian dollar is buying 70.32 US cents, down from 70.58 US cents on Wednesday at 5pm, as the greenback rose on the back of a hawkish Federal Reserve outlook.
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