* Fed announcement expected at 2 p.m. ET (1800 GMT)
* Yellen speaks half an hour later
* U.S. fund futures see 25 pct chance of hike on Thursday
* Indexes up: Dow 0.27 pct, S&P 0.32 pct, Nasdaq 0.49 pct (Updates to early afternoon)
By Tanya Agrawal
Sept 17 (Reuters) - U.S. stocks were higher in thin afternoon trading on Thursday, with investors hanging fire half an hour ahead of the Federal Reserve's interest rate decision.
The Fed will announce the outcome of its policy meeting and release its latest economic projections at 2 p.m. ET (1800 GMT), followed by a news conference by Chair Janet Yellen at 2:30 p.m.
An increase in the Fed's benchmark rate, which has been held near zero since the depths of the financial crisis in December 2008, would be the first since 2006.
A hike is far from certain. U.S. interest rates futures indicated a 25 percent chance the central bank will raise rates on Thursday, while 35 of 80 economists polled by Reuters earlier this week said they expected a move.
"If the Fed doesn't raise today, we can expect volatility to be elevated as we head into early October," said Philip Blancato, chief executive of Ladenberg Thalmann Asset Management in New York.
Low rates have helped nurse the economy back to health since the financial crisis and underpinned a spectacular six-year bull run for stocks. However, there are concerns that continuing with ultra-low rates for too long could lead to asset bubbles such as the one in property prices that led to the last recession.
If the Fed doesn't pull the trigger, the focus will move to the next Fed meeting on Oct. 27-28.
And whether or not the Fed moves, investors will be hanging on every word during Yellen's news conference.
Uncertainty about when the Fed will shift gear has dogged Wall Street for months - a situation that has been complicated in recent weeks by market turbulence linked to slowing growth in China and worries about the health of the global economy.
However, many analysts say a rate hike now would at least remove a lot of the uncertainty that has troubled investors.
"A move today will bring some clarity and stability in the markets," said Craig Bishop, lead strategist of U.S. fixed-income strategies at RBC Wealth Management. "It is very unlikely there will be a perfect situation where all systems are clear for the Fed to raise rates. Something will always come up."
Jeffrey Gundlach, chief executive and chief investment officer of DoubleLine Capital, told CNBC that stocks would likely spike higher if the Fed holds off.
At 13:30 ET, all three major indexes were at or near their highs for the day, with the S&P 500 above 2,000 for the first time since Aug. 21.
The S&P was up 6.32 points, or 0.32 percent, at 2,001.63, while the Dow Jones industrial average was up 44.76 points, or 0.27 percent, at 16,784.71, and the Nasdaq Composite index was up 23.87 points, or 0.49 percent, at 4,913.11.
Seven of the 10 major S&P sectors were higher, with the energy index's 0.65 percent rise leading the way.
The telecommunications index's 1.55 percent loss led the decliners. Verizon's 2.4 percent fall weighed most on the Dow after the company said it expected 2016 earnings to "plateau" amid stiff competition.
The CBOE volatility index, known as Wall Street's "fear gauge", was up 2.3 percent at 21.84, above its long-term average of 20, after hitting a high of 22.56.
The Fed has said it will raise rates when it sees a sustained recovery in the economy.
"If the Fed does raise today, the market will sell off but that is not going to last because the U.S. consumer is very strong," said Blancato.
Data on Thursday showed the number of Americans filing new applications for unemployment benefits fell last week to the lowest level in eight weeks.
Other figures showed that housing starts fell more than expected in August, but a rebound in building permits pointed to strength in the housing market, which should support economic growth.
Cablevision jumped 15.1 percent to $32.84 after European telecoms group Altice agreed to buy the company in a deal valued at $17.7 billion.
Oracle fell 3.1 percent to $37.08 a day after the company warned that revenue could fall in the current quarter.
Rite Aid dropped 9.9 percent to $7.74 in heavy trading after the drugstore chain operator cut its full-year sales and earnings forecasts.
Advancing issues outnumbered decliners on the NYSE by 1,683 to 1,217. On the Nasdaq, 1,795 issues rose and 921 fell.
The S&P 500 index showed eight new 52-week highs and two new low, while the Nasdaq recorded 44 new highs and 26 new lows. (Reporting by Tanya Agrawal; Editing by Ted Kerr)