* Fed keeps rates unchanged, eyes two hikes this year
* S&P 500 closes at highest level of the year
* Indexes up: Dow 0.43 pct, S&P 0.56 pct, Nasdaq 0.75 pct (Adds FedEx shares up after earnings reported)
By Laila Kearney
NEW YORK, March 16 (Reuters) - The S&P 500 closed at its highest level of the year on Wednesday after the U.S. Federal Reserve left interest rates untouched and signaled fewer rate hikes in coming months.
The Fed indicated moderate U.S. economic growth and “strong job gains” would allow it to tighten policy this year with fresh projections showing policymakers expected two quarter-point hikes by the year’s end, half the number seen in December.
But the U.S. central bank noted the United States continues to face risks from an uncertain global economy.
Because of that uncertainty, “the committee judged it prudent to maintain the current policy stance at this meeting,” Fed Chair Janet Yellen said.
The decision to keep rates steady was in line with analyst predictions, but the Fed’s tone was surprising to some.
“Most folks were looking for a slightly hawkish statement and they did not deliver in that,” said Tom Porcelli, RBC Capital Markets chief U.S. economist. “It was balanced at best and probably even slightly dovish.”
The Dow Jones industrial average closed up 74.23 points, or 0.43 percent, to 17,325.76, the S&P 500 had gained 11.29 points, or 0.56 percent, to 2,027.22 and the Nasdaq Composite had added 35.30 points, or 0.75 percent, to 4,763.97.
The CBOE volatility index a gauge of what equity investors are willing to pay for protection against a drop on the S&P 500, closed at its lowest since early December.
Eight of the 10 major S&P sectors closed higher. Materials were up the most at 1.74 percent. Healthcare and financial stocks lagged.
The S&P energy sector rose 1.6 percent as U.S. oil prices jumped almost 6 percent after major producers firmed up plans to discuss an output freeze and U.S. crude stockpiles grew less than expected.
In corporate news, shares of Peabody Energy Corp, the largest U.S. coal producer, fell 45.4 percent to $2.19. after the company said in a regulatory filing it may have to seek bankruptcy protection.
FedEx shares jumped 5.3 percent after markets closed on a strong full-year earnings forecast in its fiscal third-quarter financial results.
LinkedIn fell 4.9 percent at $109.81 and Gap fell 1.4 percent to $29.28 after Morgan Stanley downgraded both stocks.
Mallinckrodt dropped 6.4 percent to $55.69, continuing its slide for a second day, while fellow specialty drugmaker Endo International recouped some of its losses from Tuesday, jumping 4.1 percent to $33.91.
About 7.6 billion shares changed hands on U.S. exchanges, below the 8.1 billion average over the last 20 sessions.
Advancing issues outnumbered declining ones on the NYSE by 2,462 to 590, for a 4.17-to-1 ratio on the upside; on the Nasdaq, 1,675 issues rose and 1,084 fell for a 1.55-to-1 ratio favoring advancers.
The S&P 500 posted 36 new 52-week highs and 5 new lows; the Nasdaq recorded 38 new highs and 62 new lows. (Additional reporting by Lewis Krauskopf in New York and Karen Brettell; Editing by Nick Zieminski and Meredith Mazzilli)