US STOCKS-Wall Street dips as Fed meeting kicks off

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Updates with afternoon trading

By Noel Randewich

March 16 (Reuters) - Wall Street dipped on Tuesday, pulled lower by energy stocks and threatening to put an end to a recent rally, while investors awaited the result of the Federal Reserve's two-day policy meeting.

The Nasdaq turned negative in afternoon trading after earlier touching a two-week high.

The S&P 500 and Dow Jones Industrial Average closed at record highs in the prior session as optimism about a $1.9 trillion fiscal stimulus package and ongoing vaccination drives bolstered views that the economy was on a path to recovery.

However, stimulus and improving economic data have recently stoked inflation worries, pushing up yields and upending equity markets in February.

Wall Street's fear gauge .VIX hit a five-week low at 19.68 points as yields on the benchmark U.S. 10-year Treasury US10YT=RR slipped for the second straight session to 1.59% from a 13-month high hit last week.

Fears about an overheating economy and a jump-forward in interest rate expectations have increased scrutiny on the Fed meeting, where policymakers are likely to raise economic forecasts and repeat their pledge to remain accommodative for the foreseeable future. nL1N2L82OT

Investors have slightly increased their cash allocation, deeming that inflation and 'taper tantrums' could topple the record rally in financial markets, BofA's March fund manager survey showed on Tuesday. nL8N2LE2K2

"This Fed meeting is one of the most important ones for the market in a long time. It is the first we have had after the recent inflation rate rise and concerns about inflation," said Tom Martin, senior portfolio manager at Globalt Investments in Atlanta.

Data showed retail sales dropped more than expected in February due to bitterly cold weather across the country. Another report indicated winter storms in Texas led to a plunge in U.S. factory output last month. nL1N2LD1V6 nL1N2LD290

At midafternoon, the Dow Jones Industrial Average .DJI was down 0.45% at 32,805.03 points, while the S&P 500 .SPX lost 0.28% to 3,957.79.

The Nasdaq Composite .IXIC dropped 0.18% to 13,435.18.

Energy stocks .SPNY slumped 2.4% after a drop in oil prices while financials .SPNY retreated about 1%. Technology .SPLRCT and communication services .SPLRCL jumped about 0.5% and 0.7%, respectively.

The Russell growth index .RLG was marginally higher versus the Russell value index's .RLV 0.7% fall, in a slight reversal of a recent trend away from technology and other high-growth stocks.

Ford Motor Co F.N dropped over 4% after announcing a $2 billion convertible debt deal. nL1N2LE0TZ

Declining issues outnumbered advancing ones on the NYSE by a 1.87-to-1 ratio; on Nasdaq, a 2.65-to-1 ratio favored decliners.

The S&P 500 posted 72 new 52-week highs and no new lows; the Nasdaq Composite recorded 214 new highs and 13 new lows.

(Reporting by Noel Randewich in San Francisco and Medha Singh and Shashank Nayar in Bengaluru
Editing by Maju Samuel and Matthew Lewis)

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