By Anora Mahmudova and Barbara Kollmeyer, MarketWatch

NEW YORK (MarketWatch) -- The U .S. equity market rallied in early afternoon Tuesday, driven by big gains in energy sector stocks, as investors turned modestly optimistic ahead of the key Federal Reserve meeting.

The Federal Open Market Committee's two-day policy meeting, which began Tuesday morning, may offer the clearest insight yet as to wether the U.S. central bank will dial up rates sooner than expected.

Recent worries that policy makers may signal that they will begin raising key interest rates as early as the first quarter of next year contributed to a modest pullback this month. However, the Federal Reserve may keep the words "considerable time" in its policy statement, but qualify them, the Wall Street Journal's chief economics correspondent Jon Hilsenrath said Tuesday in a webcast previewing the central bank's two-day policy meeting. Also read: Eight keys to Fed's September meeting

The S&P 500 (SPX) gained 14 points, or 0.7%, to 1,998.80. All ten main sectors posted gains, while energy sector stocks rallied more than 2%.

The Dow Jones Industrial Average (DJI) rose 108 points, or 0.6%, to 17,133.52. The Nasdaq Composite (RIXF) added 22 points, or 0.5%, to 4,540.74.

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"The Fed is not going to need to hurry and is going to be very careful. It does not want to make the mistake of raising interest rates too soon and risk tipping the economy back toward a slower pace of growth," wrote Scott Wren, senior equity strategist at Wells Fargo Advisors.

"Those anticipating a more hawkish tone from the Fed will likely be disappointed," Wren added.

Joe Bell, senior equity analyst at Schaeffer's Investment Research, pointed out that the market has not seen dramatic selloffs and small consolidation is logical after a strong rally like the one in August.

"Markets are pricing in the beginning of interest-rate hikes at spring-summer of 2015 and whether it will be in April or August does not make much difference, Bell said.

In economic news, producer prices were flat in August thanks to falling gasoline and food costs, another sign that inflationary pressure is receding. It was the lowest reading in the producer price index since December, the Labor Department reported.

Global Head of Asset Allocation at Societe Generale Alain Bokobza and his team advised investors to "switch out of expensive, illiquid and over-owned assets" like small-cap stocks and into large-cap equities in Europe and the U.S. "As the Fed continues to normalize its monetary policy, small caps are at risk of a large correction," he wrote. Read Need to Know: A dearth of deep-value plays

Data compiled by Bloomberg News showed 47% of stocks in the Nasdaq Composite are down at least 20% from their peak in the past 12 months, and more than 40% of Russell 2000 (RUT) companies have fallen by as much. Meanwhile, the S&P 500 index has logged 33 new closing highs this year, and fewer than 6% of companies have entered what is considered bear-market territory, Bloomberg reported Monday.and

Stocks to watch: Majesco Entertainment Co. (COOL) fell 19% after a similar drop late Monday when the video-game maker posted a larger-than-expected third-quarter loss.

Wynn Resorts Ltd. (WYNN) dropped 2.1%, falling for a third trading session amid declining revenue concerns from its properties in Macau. However, Nomura analyst Harry Curtis noted that Wynn's recent drop has made it a fair value at current prices.

Humana Inc. (HUM) shares rallied 3.2% after the health insurance company unveiled a $2 billion buyback program that will replace its current share repurchase program.

Tesla Motors Inc. (TSLA) rose 1.6% recouping some of the sharp losses Monday when a Morgan Stanley argued that the electric-car maker's stock is overvalued. Trip Chowdhry at Global Equities Research, however, advised in a note Tuesday that investors buy Tesla on weakness, reiterating an overweight rating and a 12-to-18-month price target of $385. (Read more about the day's notable movers here: http://www.marketwatch.com/story/adobe-factset-earnings-in-spotlight-2014-09-16.)

Other markets: Oil prices rallied after OPEC's secretary general Abdalla el-Badri reportedly said he expects oil prices to recover later this year. In addition, he said OPEC may cut its output targets, according to media reports. The comments pushed crude-oil prices (CLV4) up by almost 2% and helped U.S. energy majors.

Asian stocks largely fell. China's largest wireless carrier China Mobile Ltd. tumbled 3.8% at the close, after reports said the release date for iPhone 6 in mainland China is still uncertain. China data also showed that in August foreign direct investment fell to a four-year low. This followed weak factory data released over the weekend.

Worries about this week's Scottish referendum continued to dull markets, also weighing some on U.S. stock futures and a disappointing German economic sentiment survey further put pressure on European stocks .

Among currencies, the Russian ruble (USDRUB) continued to fall against the U.S. dollar, off another 1% as sanctions worries weighed. Gold(GCZ4) prices were little changed.

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