By Tanya Agrawal
(Reuters) - U.S. stocks trimmed gains but remained in positive territory in afternoon trading on Wednesday, half an hour ahead of a widely anticipated interest rate hike by the Federal Reserve.
An increase in the Fed's benchmark rate, from near zero, would be the first since June 29, 2006. Traders see an 81.4 percent chance of a rate hike, according to the CME Group's FedWatch tool.
The U.S. central bank is expected to raise rates by a token 25 basis points, when it announces the outcome of its policy meeting at 2 p.m. ET (1900 GMT). Fed Chair Janet Yellen will hold a news conference by at 2:30 p.m. ET.
The Fed is expected to move gradually on subsequent rate hikes after the initial liftoff, according to a Reuters poll. That will help soothe jittery markets, which have been roiled recently by a rout in crude oil prices and a fall in the Chinese yuan.
The rate hike will be a highly symbolic move, coming exactly seven years to the day since the Fed cut rates to near zero as the financial crisis engulfed the world.
Since then, the U.S. stock market has staged a spectacular bull-run, with the S&P 500 index (SPX) (INX) more than doubling and the Nasdaq composite index (IXIC) briefly breaching its dotcom boom highs.
"I think we can use a great Star Wars analogy and say that 'the force' will awaken and the Fed will raise that quarter percent today," said Jeff Carbone, managing partner of Cornerstone Financial Partners.
"Now we've got to look at how Janet Yellen raises rates. Is it going to be too fast, or too slow or just right?"
At 13:30 p.m. ET the Dow Jones industrial average (DJI) was up 37.41 points, or 0.21 percent, at 17,562.32, the S&P 500 (SPX) was up 7.3 points, or 0.36 percent, at 2,050.71 and the Nasdaq Composite index (IXIC) was up 12.14 points, or 0.24 percent, at 5,007.49.
Seven of the 10 major S&P sectors were higher, with the utilities index's <.SPLRCU> 1.87 percent rise leading the advancers.
Energy and material stocks were down as crude oil prices fell on fresh evidence of growing global oversupply. [O/R]
DuPont's (N:DD) 2.7 percent fall weighed the most on the Dow. Oil majors Chevron (N:CVX) and Exxon (N:XOM) were down about 1 percent.
Apple (O:AAPL) was down 1.3 percent at $109.05 as Bank of America Merrill Lynch joined a growing Wall Street chorus, scaling down expectations for iPhone sales.
Higher interest rates make loans more expensive, crimping profit margins. Banks, however, will benefit.
Goldman Sachs (N:GS) was up 0.6 percent, while JPMorgan (N:JPM), Bank of America (N:BAC) and Citigroup (N:C) were up 0.4 percent.
The Fed has said it would raise rates when it saw a sustained recovery in the economy. While the unemployment rate has fallen to multi-year lows, inflation remains stuck below the Fed's 2 percent target.
"We expect the start of policy normalization to serve as a catalyst for normalization of the investment environment," said Mike O'Rourke, chief market strategist at Jones Trading.
The prolonged period of extremely accommodative monetary policy has distorted investment objectives, he said in a note.
Advancing issues outnumbered decliners on the NYSE by 2,077 to 953. On the Nasdaq, 1,699 issues rose and 1,063 fell.
The S&P 500 index showed nine new 52-week highs and eight new lows, while the Nasdaq recorded 31 new highs and 75 new lows.