* Fed raises key rate by 25 basis points
* Utilities sector leads gains, energy lags
* S&P 500 on track for third consecutive day higher
By Rodrigo Campos
NEW YORK, Dec 16 (Reuters) - U.S. stocks rallied in volatile trading on Wednesday after the Federal Reserve announced it is raising its key policy rate for the first time in nearly a decade.
Markets judged the Fed's statement to be dovish, supportive of risk assets including equities.
The Fed made clear that the 25-basis point rate hike was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.
"Wrapped in dovish language, the Federal Reserve has just embarked on what will be the loosest tightening in its history," said Mohamed El-Erian, chief economic advisor at Allianz in Newport Beach, California.
"The Fed is going out of its way to assure markets that, by embarking on a 'gradual' path, this will not be your traditional interest rate cycle. Instead it will be one remembered as an unusually loose tightening."
The Dow Jones industrial average rose 164.68 points, or 0.94 percent, to 17,689.59, the S&P 500 gained 22.04 points, or 1.08 percent, to 2,065.45 and the Nasdaq Composite added 53.66 points, or 1.07 percent, to 5,049.01.
All but one of the ten major industry sectors of the S&P 500 traded higher, with utilities the largest percentage gainer on a more than 2-percent advance. Energy fell as crude oil prices continued to fall.
The Fed said the economy is expected to continue to perform well and a slight increase in the fed funds rate was appropriate, while it recognized that even after this hike monetary policy remains accommodative.
"This was a Santa Claus statement," said John Augustine, chief investment officer at Huntington Wealth & Investment Management in Columbus, Ohio.
They Fed "gave savers a little bit more interest, investors a little bit more confidence in the economy, businesses a little bit more expectation of inflation," he said. "What caught our attention the most was that it was a hawkish stance and a dovish statement."
Indexes briefly turned lower after the decision was announced, but sharply changed direction within five minutes of the U.S. central bank's statement.
Additional reporting by Jennifer Ablan and David Randall; Editing by Nick Zieminski