TREASURIES-Yields tumble after Fed highlights economic risks

By Karen Brettell

March 20 (Reuters) - U.S. Treasury yields tumbled on Thursday after Federal Reserve Chair Jerome Powell indicated that the U.S. central bank is ready to act in the case of a slowing economy.

He also suggested that any inflation increase caused by tariffs might not last.

Powell said on Wednesday that the initial policies of the Trump administration, including extensive import tariffs, appear to have tilted the U.S. economy toward slower growth and at least temporarily higher inflation.

Data released along with the latest policy and economic projections showed Fed officials in near unanimity that the outlook was more uncertain than usual, and that risks considered balanced as of the Fed's January 28-29 meeting were now tilted towards slower growth, higher joblessness and higher inflation.

Overall, growth concerns appeared to overshadow fears over a renewed surge in prices.

“The statement yesterday from the Fed and the press conference had a dovish theme to it,” said Tom di Galoma, managing director at Mischler Financial Group. “There seems to be a lot of worries at the Fed about what all these global tariffs will do and how it might slow down the economy.”

U.S. President Donald Trump plans to introduce reciprocal tariff rates on April 2.

Fed policymakers also said they continue to expect to cut rates by 50 basis points this year, offsetting some concerns that this projection could be reduced to only one 25-basis-point cut. However, even though the median interest rate expectation remained the same, a greater number of policymakers adjusted their forecasts to include fewer rate cuts.

“Overall, we think the market’s dovish response has been warranted, as Chair Powell has once again reaffirmed an asymmetrically dovish bias,” JPMorgan analysts led by Jay Barry said in a report.

“In attributing much of the expected rise in inflation to tariffs, referring to the current policy setting as “well positioned” and highlighting “uncertainty” more than 10 times, this all leans toward a Fed that is prepared to act more aggressively should labor markets loosen rapidly,” they said.

The Fed also said it will taper its quantitative easing program, in which it is letting bonds roll off its balance sheet without replacement, which was a further boost to the bond market.

The yield on benchmark U.S. 10-year notes US10YT=RR was last down 6.9 basis points on the day at 4.187%.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, fell 4.9 basis points to 3.93%.

The yield curve between two-year and 10-year notes US2US10=TWEB flattened by around 2 basis points to 25.5 basis points.

Data on Thursday showed that the number of Americans filing new applications for unemployment benefits increased slightly last week.

The U.S. Treasury will sell $18 billion 10-year Treasury Inflation-Protected Securities on Thursday.