*

Nov. PCE at 2.4% on yearly basis, below estimated 2.5%

*

Real estate leads S&P sectors higher

*

Indexes up: Dow 1.53%, S&P 500 1.45%, Nasdaq 1.48%

(Updates to mid-afternoon trading)

By Chuck Mikolajczak

NEW YORK, Dec 20 (Reuters) -

U.S. stocks rallied on Friday after two lackluster sessions

as a cooler-than-expected inflation report and comments from

Federal Reserve officials eased worries about the path of

interest rates.

The latest inflation report in the form of the Personal

Consumption Expenditure (PCE) index showed a 2.4% rise in

November on an annual basis, just below the 2.5% estimate of

economists polled by Reuters.

Consumer spending increased in November in another sign of

economic resilience.

After the data, traders raised their slightly increased

expectations for Fed rate cuts in 2025, now expecting the first

one in March and another by October. Before the data, traders

saw a roughly 50% chance of a second rate cut by December 2025.

On Wednesday, the Fed announced its third interest-rate cut

of the year but forecast in its summary of economic projections

(SEP) just two 25-basis point cuts for 2025, down from its

September view of four cuts, in a nod to the economy's continued

health and sticky inflation.

The announcement sparked a sharp sell-off late on Wednesday,

which equities were unable to bounce back from on Thursday. Even

with Friday's rally, each of the three major U.S. indexes were

on track for a weekly decline.

Also providing support were

comments

from Fed officials, with some acknowledging they were

starting to factor in fiscal policy uncertainty, such as

tariffs, in their outlooks.

"It's kind of obvious what's going on - it's just this

PCE plus dovish Fed commentary offset the market overreaction to

the hawkish cut that everybody was expecting," said Jay

Hatfield, CEO at Infrastructure Capital Advisors in New York.

"We've seen this like 10 times during this Fed cycle.

The market just always overreacts on one side or the other."

The Dow Jones Industrial Average rose 647.56

points, or 1.53%, to 42,990.10, the S&P 500 climbed 84.91

points, or 1.45%, to 5,951.99 and the Nasdaq Composite

gained 287.47 points, or 1.48%, at 19,660.58.

The Nasdaq was poised to snap a four-week streak of gains,

with the S&P 500 on pace for its biggest weekly

percentage decline in six. The Dow was on track for its

third consecutive weekly fall.

Each of the 11 major S&P sectors advanced in the

broad-based rally, led by a gain of more than 2% in real estate

and buoyed

by a drop

in Treasury yields.

Small cap stocks as measured by the Russell 2000,

which are also seen as likely to benefit from lower interest

rates, rallied more than 1%.

Friday's session also marks the simultaneous expiry of

quarterly derivatives contracts tied to stocks, index options

and futures, also known as "triple witching," which could

exacerbate volatility.

Markets were also monitoring the U.S. Congress as it

scrambled to avert a partial government shutdown before a

midnight deadline, after more than three dozen Republicans

rejected a demand by President-elect Donald Trump to use the

measure to lift the nation's debt ceiling.

Advancing issues outnumbered decliners by a 3.93-to-1 ratio

on the NYSE and by a 2.59-to-1 ratio on the Nasdaq.

The S&P 500 posted two new 52-week highs and 22 new lows,

while the Nasdaq Composite recorded 36 new highs and 210 new

lows.