TREASURIES-Prices fall as tariffs weigh, Fed's Powell in no rush to cut rates

Recasts, adds new comments, byline, bullets, updates prices

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 11 (Reuters) - U.S. Treasury prices fell on Tuesday, pushing yields higher, as investors grew cautious about steep tariffs on all steel and aluminum imports that will take effect next month, stoking worries about reaccelerating inflation.

It is a scenario that could push the Federal Reserve to hold interest rates unchanged for a longer period than expected, or even hike them. The U.S. rate futures market has priced in about 36 basis points of easing this year, or one rate cut of 25 bps, with a roughly 44% chance of another rate cut in 2025.

President Donald Trump signed proclamations late on Monday raising the U.S. tariff rate on aluminum to 25% from his previous 10% rate and eliminating country exceptions and quota deals, as well as hundreds of thousands of product-specific tariff exclusions for both metals. That move sparked condemnation from the European Union, Canada and Mexico.

"What's driving the market is uncertainty and tariffs are part of that uncertainty: whether tariffs will increase inflation or decrease (inflation)," said Brian Reynolds, chief market strategist at Reynolds Strategy in Massachusetts.

"Tariffs by themselves are inflationary. However, when the president announces tariffs, it sends the stock market lower, but then the next step is that decreases demand, which would lower inflation."

In late morning trade, the U.S. benchmark 10-year yield rose 4.8 bps to 4.543% US10YT=RR, rising for a fourth-straight session. U.S. 30-year yields also increased, up 4.1 bps at 4.751% US30YT=RR.

On the short end of the curve, the two-year yield, which tracks policy moves by the Fed, gained 2.6 bps to 4.294% US2YT=RR, after earlier hitting its highest in three weeks, of 4.298%.

Treasury yields slightly extended gains after Fed Chair Jerome Powell said the central bank is not in a rush to cut interest rates given an economy that is "strong overall" and inflation that remains above its 2% target. Powell's comments were in line with market expectations.

"We do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation," Powell said, in remarks prepared for delivery at a Senate Banking Committee hearing on Tuesday.

Bradley Saunders, North America economist at Capital Economics, wrote in a research note after Powell's comments that while there was no "explicit mention" of tariffs in Powell's statement or in the communication surrounding last month's monetary policy decision, the "erratic policymaking of President Trump" is on the minds of Fed policymakers as the central bank considers its next move.

"Amid such uncertainty, we see little chance of interest rate cuts this year," Saunders said.

Also on Tuesday, the Treasury will sell $58 billion in U.S. three-year debt and strategists at JPMorgan believe the auction will go smoothly, given the note's attractive valuations. The three-year note, JPMorgan said, has "underperformed along the curve" and looked about 1.3 bps cheaper.