* Fed sees three rate hikes in 2017
* Banks lead gainers; provide biggest boost
* Yahoo falls after disclosing largest security breach in history
* Indexes up: Dow 0.65 pct, S&P 0.64 pct, Nasdaq 0.60 pct (Adds details, changes comment, updates prices)
By Tanya Agrawal
Dec 15 (Reuters) - U.S. stocks hovered near record highs on Thursday as bank stocks rose, and investors viewed the Federal Reserve's interest rate outlook as a sign of confidence in the economy.
The Fed sees three rate hikes next year instead of the two foreseen as of September, partly as a result of the changes anticipated under President-elect Donald Trump.
Fed Chair Janet Yellen also cited an improving labor market and evidence of faster inflation for its 2017 rate outlook.
The central bank's decision to raise rates comes as Trump, who will be sworn in next month, is expected to cut taxes and boost spending on infrastructure.
"Investors are buying Yellen's story that the rate hike is a vote of confidence in the economy," said Dave Donabedian, chief investment officer of Atlantic Trust in Boston.
"The economy is growing, the job market is strong and that monetary normalization can proceed."
Since the U.S. presidential election, stocks have rallied on bets that Trump's business friendly proposals will stimulate the economy.
The Dow is less than 100 points away from the 20,000 mark, while the S&P has risen more than 5 percent since Nov.8.
Still, there are some concerns that the rally has gone too far too soon and that valuations are slightly stretched.
"The recent rally is based on sentiment and 'back-of-the-envelope' calculations regarding how the tax reform will help companies. The reforms haven't happened as yet," said Donabedian.
At 11:02 a.m. ET (1602 GMT) the Dow Jones industrial average was up 129.01 points, or 0.65 percent, at 19,921.54.
The S&P 500 was up 14.61 points, or 0.64 percent, at 2,267.89.
The Nasdaq Composite was up 32.70 points, or 0.6 percent, at 5,469.37.
All 11 major S&P sectors were higher, with the financial index's 1.46 percent rise leading the gainers. The index touched its highest level since Feb 2008 earlier in the day.
JPMorgan, Wells Fargo and Bank of America were up between 1.6-2.5 percent, boosting the S&P.
Dow was lifted by a 3.7 percent jump in Goldman Sachs and a 1.4 percent rise in American Express.
U.S. stocks fell the most in two months on Wednesday after the central bank's hawkish stance took some investors by surprise and crude oil tumbled.
Economic data on Thursday showed U.S. consumer prices moderated in November, but the underlying trend continued to point to firming inflation pressures.
Other data showed weekly jobless claims fell and home builder sentiment rose to its highest level since 2005 in December.
Mondelez was up 5.3 percent at $45.08 after reports that Kraft Heinz may buy the Cadbury chocolate maker. The stock gave the second-biggest boost to the Nasdaq. Kraft rose 1.1 percent to $85.25.
Yahoo fell 5.2 percent to $38.82 after CNBC reported that Verizon is weighing scrapping its deal with the company after it disclosed the largest security breach in history. Yahoo said data from more than 1 billion accounts was compromised in August 2013.
Advancing issues outnumbered decliners on the NYSE by 1,805 to 1,077. On the Nasdaq, 1,831 issues rose and 836 fell.
The S&P 500 index showed 26 new 52-week highs and no new lows, while the Nasdaq recorded 105 new highs and 29 new lows. (Reporting by Tanya Agrawal in Bengaluru; Editing by Anil D'Silva)