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* Tesla, VF Corp drag consumer discretionary sector
* Arm Holdings drop as Bernstein initiates coverage
* PayPal slips after stock downgrade
* Indexes up: Dow 0.12%, S&P 0.17%, Nasdaq 0.16%
NEW YORK, Sept 18 (Reuters) - Wall Street notched tentative gains on Monday as market participants looked ahead to the U.S. Federal Reserve's expected decision to leave key interest rates unchanged on Wednesday.
All three major U.S. stock indexes were up modestly in a choppy session, with few catalysts and little conviction heading into the Fed's two-day monetary policy meeting.
"(Fed Chairman Jerome) Powell can spark big moves in either direction with his comments and you don’t want to get caught on the wrong side of it," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. "The best strategy for the next couple of days is waiting to see what transpires."
The central bank has vowed to remain agile with respect to economic data, which has shown signs that core inflation remains on its meandering descent back toward the Fed's annual 2% target, and suggests the U.S. economy remains on firm footing.
Against this backdrop, growing jitters that a stalemate on Capitol Hill could result in a potential government shutdown had market participants on edge.
Treasury Secretary Janet Yellen on Monday said that while she sees no risk of an economic downtown, she warned that a government shutdown would be "Creating ... a situation that could cause a loss of momentum is something we don't need as a risk at this point."
The week's main event is the Fed's policy meeting, which is expected culminate in a rate hike pause, leaving the Fed funds target rate unchanged for the second time since March 2022, when the central bank fired its opening salvo in its battle against inflation.
The Federal Open Markets Committee (FOMC) is also due to release its quarterly Summary of Economic Projections, which will include the "dot plot," or a glimpse into participating members' expectations regarding the future path of interest rates.
Financial markets have currently baked in a 99% certainty that the Fed will hold the key rate at 5.25%-5.00% on Wednesday. Beyond that, the trajectory is less certain, with a 69% likelihood of the FOMC holding firm in November, according to CME's FedWatch tool.
The Dow Jones Industrial Average rose 42.38 points, or 0.12%, to 34,660.62, the S&P 500 gained 7.39 points, or 0.17%, to 4,457.71 and the Nasdaq Composite added 21.87 points, or 0.16%, to 13,730.20.
Technology shares, led by Apple Inc, were the biggest gainers among the 11 major sectors of the S&P 500, while consumer discretionary stocks suffered the biggest percentage drop, with Tesla Inc and Microsoft Corp weighing heaviest.
VF Corp slumped 4.7% after Piper Sandler downgraded the apparel company's shares to "neutral" from "overweight."
British chipmaker Arm Holdings slid 7.2% after Bernstein initiated coverage with an "underperform" rating just days after its stellar debut.
Paypal Holdings dipped 1.6% after MoffettNathanson cut its rating to "market perform" from "outperform."
Declining issues outnumbered advancing ones on the NYSE by a 1.02-to-1 ratio; on Nasdaq, a 1.48-to-1 ratio favored decliners.
The S&P 500 posted 5 new 52-week highs and 11 new lows; the Nasdaq Composite recorded 34 new highs and 205 new lows. (Reporting by Stephen Culp; Additional reporting by Ankika Biswas and Shristi Achar A in Bengaluru; Editing by Aurora Ellis)