diff --git a/docs/source-fabric/api/fabric_args.rst b/docs/source-fabric/api/fabric_args.rst
index e7829acaeabe7..4e140814a7657 100644
--- a/docs/source-fabric/api/fabric_args.rst
+++ b/docs/source-fabric/api/fabric_args.rst
@@ -123,13 +123,19 @@ This can result in improved performance, achieving significant speedups on moder
     # the same as:
     fabric = Fabric(precision="32", devices=1)
 
-    # 16-bit (mixed) precision
+    # 16-bit mixed precision (model weights remain in torch.float32)
     fabric = Fabric(precision="16-mixed", devices=1)
 
-    # 16-bit bfloat precision
+    # 16-bit bfloat mixed precision (model weights remain in torch.float32)
     fabric = Fabric(precision="bf16-mixed", devices=1)
 
-    # 64-bit (double) precision
+    # 16-bit precision (model weights get cast to torch.float16)
+    fabric = Fabric(precision="16-true", devices=1)
+
+    # 16-bit bfloat precision (model weights get cast to torch.bfloat16)
+    fabric = Fabric(precision="bf16-true", devices=1)
+
+    # 64-bit (double) precision (model weights get cast to torch.float64)
     fabric = Fabric(precision="64-true", devices=1)
 
 See also: :doc:`../fundamentals/precision`
diff --git a/docs/source-fabric/fundamentals/precision.rst b/docs/source-fabric/fundamentals/precision.rst
index 731f7d42fe423..2108676cab285 100644
--- a/docs/source-fabric/fundamentals/precision.rst
+++ b/docs/source-fabric/fundamentals/precision.rst
@@ -118,6 +118,41 @@ It is also possible to use BFloat16 mixed precision on the CPU, relying on MKLDN
 ----
 
 
+*******************
+True Half Precision
+*******************
+
+As mentioned before, for numerical stability mixed precision keeps the model weights in full float32 precision while casting only supported operations to lower bit precision.
+However, in some cases it is indeed possible to train completely in half precision. Similarly, for inference the model weights can often be cast to half precision without a loss in accuracy (even when trained with mixed precision).
+
+.. code-block:: python
+
+    # Select FP16 precision
+    fabric = Fabric(precision="16-true")
+    model = MyModel()
+    model = fabric.setup(model)  # model gets cast to torch.float16
+
+    # Select BF16 precision
+    fabric = Fabric(precision="bf16-true")
+    model = MyModel()
+    model = fabric.setup(model)  # model gets cast to torch.bfloat16
+
+Tip: For faster initialization, you can create model parameters with the desired dtype directly on the device:
+
+.. code-block:: python
+
+    fabric = Fabric(precision="bf16-true")
+
+    # init the model directly on the device and with parameters in half-precision
+    with fabric.init_module():
+        model = MyModel()
+
+    model = fabric.setup(model)
+
+
+----
+
+
 ************************************
 Control where precision gets applied
 ************************************
diff --git a/src/lightning/fabric/CHANGELOG.md b/src/lightning/fabric/CHANGELOG.md
index 62b0c6586622f..a347822e8e9ea 100644
--- a/src/lightning/fabric/CHANGELOG.md
+++ b/src/lightning/fabric/CHANGELOG.md
@@ -39,6 +39,9 @@ The format is based on [Keep a Changelog](http://keepachangelog.com/en/1.0.0/).
 - Run the DDP wrapper in a CUDA stream ([#17334](https://github.com/Lightning-AI/lightning/pull/17334))
 
 
+- Added support for true half-precision as `L.Fabric(precision="16-true"|"bf16-true")` ([#17287](https://github.com/Lightning-AI/lightning/pull/17287))
+
+
 ### Changed
 
 - Allow using iterable-style datasets with TPUs ([#17331](https://github.com/Lightning-AI/lightning/pull/17331))
@@ -55,7 +58,8 @@ The format is based on [Keep a Changelog](http://keepachangelog.com/en/1.0.0/).
 
 ### Deprecated
 
--
+
+- Deprecated the `Fabric.sharded_model()` context manager in favor of `Fabric.init_module()` ([#17462](https://github.com/Lightning-AI/lightning/pull/17462))
 
 
 ### Removed
diff --git a/src/lightning/fabric/connector.py b/src/lightning/fabric/connector.py
index 4eae73e33de48..f90fd3347f7a4 100644
--- a/src/lightning/fabric/connector.py
+++ b/src/lightning/fabric/connector.py
@@ -26,6 +26,7 @@
 from lightning.fabric.plugins import (
     CheckpointIO,
     DeepSpeedPrecision,
+    HalfPrecision,
     MixedPrecision,
     Precision,
     TPUBf16Precision,
@@ -446,6 +447,8 @@ def _check_and_init_precision(self) -> Precision:
         if isinstance(self.strategy, DeepSpeedStrategy):
             return DeepSpeedPrecision(self._precision_input)  # type: ignore
 
+        if self._precision_input in ("16-true", "bf16-true"):
+            return HalfPrecision(self._precision_input)  # type: ignore
         if self._precision_input == "32-true":
             return Precision()
         if self._precision_input == "64-true":
@@ -467,8 +470,8 @@ def _check_and_init_precision(self) -> Precision:
             device = "cpu" if self._accelerator_flag == "cpu" else "cuda"
 
             if isinstance(self.strategy, FSDPStrategy):
-                return FSDPPrecision(precision=self._precision_input, device=device)
-            return MixedPrecision(precision=self._precision_input, device=device)
+                return FSDPPrecision(precision=self._precision_input, device=device)  # type: ignore[arg-type]
+            return MixedPrecision(precision=self._precision_input, device=device)  # type: ignore[arg-type]
 
         raise RuntimeError("No precision set")
 
diff --git a/src/lightning/fabric/plugins/__init__.py b/src/lightning/fabric/plugins/__init__.py
index 31368988e2db2..c88397db89951 100644
--- a/src/lightning/fabric/plugins/__init__.py
+++ b/src/lightning/fabric/plugins/__init__.py
@@ -19,6 +19,7 @@
 from lightning.fabric.plugins.precision.deepspeed import DeepSpeedPrecision
 from lightning.fabric.plugins.precision.double import DoublePrecision
 from lightning.fabric.plugins.precision.fsdp import FSDPPrecision
+from lightning.fabric.plugins.precision.half import HalfPrecision
 from lightning.fabric.plugins.precision.precision import Precision
 from lightning.fabric.plugins.precision.tpu import TPUPrecision
 from lightning.fabric.plugins.precision.tpu_bf16 import TPUBf16Precision
@@ -31,6 +32,7 @@
     "Precision",
     "DeepSpeedPrecision",
     "DoublePrecision",
+    "HalfPrecision",
     "MixedPrecision",
     "TPUPrecision",
     "TPUBf16Precision",
diff --git a/src/lightning/fabric/plugins/precision/__init__.py b/src/lightning/fabric/plugins/precision/__init__.py
index 58f45ede53b98..a31fd78865db5 100644
--- a/src/lightning/fabric/plugins/precision/__init__.py
+++ b/src/lightning/fabric/plugins/precision/__init__.py
@@ -15,6 +15,7 @@
 from lightning.fabric.plugins.precision.deepspeed import DeepSpeedPrecision
 from lightning.fabric.plugins.precision.double import DoublePrecision
 from lightning.fabric.plugins.precision.fsdp import FSDPPrecision
+from lightning.fabric.plugins.precision.half import HalfPrecision
 from lightning.fabric.plugins.precision.precision import Precision
 from lightning.fabric.plugins.precision.tpu import TPUPrecision
 from lightning.fabric.plugins.precision.tpu_bf16 import TPUBf16Precision
@@ -22,6 +23,7 @@
 __all__ = [
     "DeepSpeedPrecision",
     "DoublePrecision",
+    "HalfPrecision",
     "MixedPrecision",
     "Precision",
     "TPUPrecision",
diff --git a/src/lightning/fabric/plugins/precision/half.py b/src/lightning/fabric/plugins/precision/half.py
new file mode 100644
index 0000000000000..7831ba5aa7110
--- /dev/null
+++ b/src/lightning/fabric/plugins/precision/half.py
@@ -0,0 +1,69 @@
+# Copyright The Lightning AI team.
+#
+# Licensed under the Apache License, Version 2.0 (the "License");
+# you may not use this file except in compliance with the License.
+# You may obtain a copy of the License at
+#
+#     http://www.apache.org/licenses/LICENSE-2.0
+#
+# Unless required by applicable law or agreed to in writing, software
+# distributed under the License is distributed on an "AS IS" BASIS,
+# WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+# See the License for the specific language governing permissions and
+# limitations under the License.
+from contextlib import contextmanager
+from typing import Any, Generator, Literal
+
+import torch
+from lightning_utilities.core.apply_func import apply_to_collection
+from torch import Tensor
+from torch.nn import Module
+
+from lightning.fabric.plugins.precision.precision import Precision
+from lightning.fabric.plugins.precision.utils import _convert_fp_tensor
+
+
+class HalfPrecision(Precision):
+    """Plugin for training with half precision.
+
+    Args:
+        precision: Whether to use ``torch.float16`` (``'16-true'``) or ``torch.bfloat16`` (``'bf16-true'``).
+    """
+
+    precision: Literal["bf16-true", "16-true"] = "16-true"
+
+    def __init__(self, precision: Literal["bf16-true", "16-true"] = "16-true") -> None:
+        self.precision = precision
+        self._desired_input_dtype = torch.bfloat16 if precision == "bf16-true" else torch.float16
+
+    def convert_module(self, module: Module) -> Module:
+        return module.to(dtype=self._desired_input_dtype)
+
+    @contextmanager
+    def module_init_context(self) -> Generator[None, None, None]:
+        """A context manager to change the default tensor type when initializing the parameters in a module.
+
+        See: :meth:`torch.set_default_tensor_type`
+        """
+        default_dtype = torch.get_default_dtype()
+        torch.set_default_dtype(self._desired_input_dtype)
+        yield
+        torch.set_default_dtype(default_dtype)
+
+    @contextmanager
+    def forward_context(self) -> Generator[None, None, None]:
+        """A context manager to change the default tensor type when tensors get created during the module's
+        forward.
+
+        See: :meth:`torch.set_default_tensor_type`
+        """
+        default_dtype = torch.get_default_dtype()
+        torch.set_default_dtype(self._desired_input_dtype)
+        yield
+        torch.set_default_dtype(default_dtype)
+
+    def convert_input(self, data: Any) -> Any:
+        return apply_to_collection(data, function=_convert_fp_tensor, dtype=Tensor, dst_type=self._desired_input_dtype)
+
+    def convert_output(self, data: Any) -> Any:
+        return apply_to_collection(data, function=_convert_fp_tensor, dtype=Tensor, dst_type=torch.get_default_dtype())
diff --git a/src/lightning/fabric/plugins/precision/precision.py b/src/lightning/fabric/plugins/precision/precision.py
index dddbfc20c8526..f42c9836b96c3 100644
--- a/src/lightning/fabric/plugins/precision/precision.py
+++ b/src/lightning/fabric/plugins/precision/precision.py
@@ -23,7 +23,7 @@
 _PRECISION_INPUT_INT = Literal[64, 32, 16]
 _PRECISION_INPUT_STR_ALIAS_CONVERSION = {"64": "64-true", "32": "32-true", "16": "16-mixed", "bf16": "bf16-mixed"}
 _PRECISION_INPUT_STR_ALIAS = Literal["64", "32", "16", "bf16"]
-_PRECISION_INPUT_STR = Literal["16-mixed", "bf16-mixed", "32-true", "64-true"]
+_PRECISION_INPUT_STR = Literal["16-true", "16-mixed", "bf16-true", "bf16-mixed", "32-true", "64-true"]
 _PRECISION_INPUT = Union[_PRECISION_INPUT_INT, _PRECISION_INPUT_STR, _PRECISION_INPUT_STR_ALIAS]
 
 
diff --git a/src/lightning/pytorch/trainer/connectors/accelerator_connector.py b/src/lightning/pytorch/trainer/connectors/accelerator_connector.py
index 3071c3fb1c8bd..245c00559b0d5 100644
--- a/src/lightning/pytorch/trainer/connectors/accelerator_connector.py
+++ b/src/lightning/pytorch/trainer/connectors/accelerator_connector.py
@@ -544,7 +544,7 @@ def _check_and_init_precision(self) -> PrecisionPlugin:
 
             if isinstance(self.strategy, FSDPStrategy):
                 return FSDPMixedPrecisionPlugin(self._precision_flag, device)
-            return MixedPrecisionPlugin(self._precision_flag, device)
+            return MixedPrecisionPlugin(self._precision_flag, device)  # type: ignore[arg-type]
 
         raise RuntimeError("No precision set")
 
diff --git a/tests/tests_fabric/plugins/precision/test_double.py b/tests/tests_fabric/plugins/precision/test_double.py
index 699fd6376299f..4921e0f4e659b 100644
--- a/tests/tests_fabric/plugins/precision/test_double.py
+++ b/tests/tests_fabric/plugins/precision/test_double.py
@@ -11,7 +11,6 @@
 # WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
 # See the License for the specific language governing permissions and
 # limitations under the License.
-
 import torch
 
 from lightning.fabric.plugins.precision.double import DoublePrecision
@@ -23,3 +22,11 @@ def test_double_precision_forward_context():
     with precision.forward_context():
         assert torch.get_default_dtype() == torch.float64
     assert torch.get_default_dtype() == torch.float32
+
+
+def test_convert_module():
+    precision = DoublePrecision()
+    module = torch.nn.Linear(2, 2)
+    assert module.weight.dtype == module.bias.dtype == torch.float32
+    module = precision.convert_module(module)
+    assert module.weight.dtype == module.bias.dtype == torch.float64
diff --git a/tests/tests_fabric/plugins/precision/test_half.py b/tests/tests_fabric/plugins/precision/test_half.py
new file mode 100644
index 0000000000000..c39d6f8a951a7
--- /dev/null
+++ b/tests/tests_fabric/plugins/precision/test_half.py
@@ -0,0 +1,75 @@
+# Copyright The Lightning AI team.
+#
+# Licensed under the Apache License, Version 2.0 (the "License");
+# you may not use this file except in compliance with the License.
+# You may obtain a copy of the License at
+#
+#     http://www.apache.org/licenses/LICENSE-2.0
+#
+# Unless required by applicable law or agreed to in writing, software
+# distributed under the License is distributed on an "AS IS" BASIS,
+# WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+# See the License for the specific language governing permissions and
+# limitations under the License.
+import pytest
+import torch
+
+from lightning.fabric.plugins.precision import HalfPrecision
+
+
+@pytest.mark.parametrize(
+    "precision, expected_dtype",
+    [
+        ("bf16-true", torch.bfloat16),
+        ("16-true", torch.half),
+    ],
+)
+def test_selected_dtype(precision, expected_dtype):
+    plugin = HalfPrecision(precision=precision)
+    assert plugin.precision == precision
+    assert plugin._desired_input_dtype == expected_dtype
+
+
+@pytest.mark.parametrize(
+    "precision, expected_dtype",
+    [
+        ("bf16-true", torch.bfloat16),
+        ("16-true", torch.half),
+    ],
+)
+def test_module_init_context(precision, expected_dtype):
+    plugin = HalfPrecision(precision=precision)
+    with plugin.module_init_context():
+        model = torch.nn.Linear(2, 2)
+        assert torch.get_default_dtype() == expected_dtype
+    assert model.weight.dtype == expected_dtype
+
+
+@pytest.mark.parametrize(
+    "precision, expected_dtype",
+    [
+        ("bf16-true", torch.bfloat16),
+        ("16-true", torch.half),
+    ],
+)
+def test_forward_context(precision, expected_dtype):
+    precision = HalfPrecision(precision=precision)
+    assert torch.get_default_dtype() == torch.float32
+    with precision.forward_context():
+        assert torch.get_default_dtype() == expected_dtype
+    assert torch.get_default_dtype() == torch.float32
+
+
+@pytest.mark.parametrize(
+    "precision, expected_dtype",
+    [
+        ("bf16-true", torch.bfloat16),
+        ("16-true", torch.half),
+    ],
+)
+def test_convert_module(precision, expected_dtype):
+    precision = HalfPrecision(precision=precision)
+    module = torch.nn.Linear(2, 2)
+    assert module.weight.dtype == module.bias.dtype == torch.float32
+    module = precision.convert_module(module)
+    assert module.weight.dtype == module.bias.dtype == expected_dtype
diff --git a/tests/tests_fabric/strategies/test_ddp.py b/tests/tests_fabric/strategies/test_ddp.py
index 7e0f0ee8e23c4..963ff607815cb 100644
--- a/tests/tests_fabric/strategies/test_ddp.py
+++ b/tests/tests_fabric/strategies/test_ddp.py
@@ -19,7 +19,7 @@
 import torch
 from torch.nn.parallel import DistributedDataParallel
 
-from lightning.fabric.plugins import DoublePrecision, Precision
+from lightning.fabric.plugins import DoublePrecision, HalfPrecision, Precision
 from lightning.fabric.plugins.environments import LightningEnvironment
 from lightning.fabric.strategies import DDPStrategy
 from lightning.fabric.strategies.ddp import _DDPBackwardSyncControl
@@ -133,6 +133,8 @@ def test_ddp_grad_clipping(clip_type, accelerator, precision):
     "precision,expected_dtype",
     [
         (Precision(), torch.float32),
+        (HalfPrecision("16-true"), torch.float16),
+        pytest.param(HalfPrecision("bf16-true"), torch.bfloat16, marks=RunIf(bf16_cuda=True)),
         (DoublePrecision(), torch.float64),
     ],
 )
diff --git a/tests/tests_fabric/strategies/test_fsdp_integration.py b/tests/tests_fabric/strategies/test_fsdp_integration.py
index 024475940f6ba..4ce58c53f9395 100644
--- a/tests/tests_fabric/strategies/test_fsdp_integration.py
+++ b/tests/tests_fabric/strategies/test_fsdp_integration.py
@@ -198,6 +198,8 @@ def test_compile(compile_after_setup):
     "precision,expected_dtype",
     [
         ("32-true", torch.float32),
+        ("16-true", torch.float16),
+        pytest.param("bf16-true", torch.bfloat16, marks=RunIf(bf16_cuda=True)),
         ("64-true", torch.float64),
     ],
 )
diff --git a/tests/tests_fabric/strategies/test_single_device.py b/tests/tests_fabric/strategies/test_single_device.py
index bab2744464f49..05c11f703d301 100644
--- a/tests/tests_fabric/strategies/test_single_device.py
+++ b/tests/tests_fabric/strategies/test_single_device.py
@@ -16,7 +16,7 @@
 import pytest
 import torch
 
-from lightning.fabric.plugins import DoublePrecision, Precision
+from lightning.fabric.plugins import DoublePrecision, HalfPrecision, Precision
 from lightning.fabric.strategies import SingleDeviceStrategy
 from lightning.fabric.utilities.imports import _TORCH_GREATER_EQUAL_2_0
 from lightning.fabric.wrappers import _FabricModule, _FabricOptimizer
@@ -163,6 +163,8 @@ def test_single_device_grad_clipping(clip_type, precision):
     "precision,dtype",
     [
         (Precision(), torch.float32),
+        (HalfPrecision("16-true"), torch.float16),
+        pytest.param(HalfPrecision("bf16-true"), torch.bfloat16, marks=RunIf(mps=False)),
         pytest.param(DoublePrecision(), torch.float64, marks=RunIf(mps=False)),
     ],
 )
diff --git a/tests/tests_fabric/test_connector.py b/tests/tests_fabric/test_connector.py
index b6b9da4947df7..05feb6350f701 100644
--- a/tests/tests_fabric/test_connector.py
+++ b/tests/tests_fabric/test_connector.py
@@ -30,7 +30,7 @@
 from lightning.fabric.accelerators.cuda import CUDAAccelerator
 from lightning.fabric.accelerators.mps import MPSAccelerator
 from lightning.fabric.connector import _Connector
-from lightning.fabric.plugins import DoublePrecision, MixedPrecision, Precision, TPUPrecision
+from lightning.fabric.plugins import DoublePrecision, HalfPrecision, MixedPrecision, Precision, TPUPrecision
 from lightning.fabric.plugins.environments import (
     KubeflowEnvironment,
     LightningEnvironment,
@@ -765,6 +765,22 @@ def test_ddp_fork_on_unsupported_platform(_, __, strategy):
         _Connector(strategy=strategy)
 
 
+@pytest.mark.parametrize(
+    "precision_str,precision_cls",
+    [
+        ("64-true", DoublePrecision),
+        ("32-true", Precision),
+        ("16-true", HalfPrecision),
+        ("bf16-true", HalfPrecision),
+        ("16-mixed", MixedPrecision),
+        ("bf16-mixed", MixedPrecision),
+    ],
+)
+def test_precision_selection(precision_str, precision_cls):
+    connector = _Connector(precision=precision_str)
+    assert isinstance(connector.precision, precision_cls)
+
+
 def test_precision_selection_16_on_cpu_warns():
     with pytest.warns(
         UserWarning,